Time Value of Money
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Sheila and Ed have approached you with their problems as highlighted situations 1-5.
Situation #1
Sheila and Ed have $150,000 cash to invest with a bank offering a 4% interest rate. They are not sure whether to invest the cash with interest rate compounded quarterly, semi-annually, or annually. Calculate the balance at the end of 5 years generated by investing $15,000 at 4% in an interest-bearing account that is compounded quarterly, semi-annually, or annually.
Situation #2
Shanghai Winters, one of BC's biggest customers, has requested a loan with favorable terms. Sheila and Ed decide to offer this customer a $70,000 five-year note receivable. You recommend that since this is your best customer, they offer a 4% interest rate rather than the 7% going rate.
Situation #3
Sheila would like to retire in 10 years. She estimates that her life expectancy upon retirement would be 17 years and she would require $90,000 a year to live comfortably.
Situation #4
XYZ Corporation has a balloon payment coming due from a recent acquisition. They need to have $200,000 set aside 5 years from now. They can either make payments into the fund at the beginning of the year or at the end of the year. The current discount rate is 6%.
Situation #5
Ed won the lottery! He can either take the $10,000,000 prize now or receive the payments over the next 15 years.
Using your knowledge of the time value of money, offer them guidance in each situation. Include the following in your answer:
What TVM concept(s) is represented in the situation?
What is the value of the money represented by the situation?
How did you arrive at the value?
To structure the task, use the format below for each situation:
Situation #__
TVM concept represented:
Value:
Explanation:
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Solution Summary
The solution goes into a great amount of detail about the question being asked. The concepts are very well explained and easy to understand. The solution can be followed very easily by anyone who has some understanding of the concepts beforehand. Overall, an excellent response to the question.
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