I put My money at The Bank..

Exercises

1)      You want to invest $10,000 in a business opportunity. If you keep the money invested in the business for two years, you will receive $11,000 back. If you keep the money invested in the business for five years, you will receive $13,000 back. Currently, the money is in your savings account, which earns 5% interest, compounded annually.

a.       What is the future value of the money if it remains in your savings account for two years?

Using present value formula to calculate the amount

FV= PV_n (1+i)ⁿ

PV= 10,000

I= 0.05

N= 2

FV= 10,000 ( 1 + 0.05)²

FV = 11,025

b.      What is the future value of the money if it remains in your savings account for five years

FV= PV_n (1+i)ⁿ

PV= 10,000

I= 0.05

N= 5

FV= 10,000 ( 1 + 0.05)⁵

FV = 12,763

c.       Is it better to invest in the business for two years, five years, or not at all?WHY?

Now I would like to show the options we have

Option 1 = $11,000 if the money invested in the business for two years

Option 2= $13,000 if the money invested in the business for five years

Option 3 = $11,025 if the money remains in our saving account for two years

Option 4 = $12,763 if the money remains in our saving account for five years

Financially, Option 3 is the best than all available options above, therefore it is better to invest in the business for five years..:-)

2)      You won the lottery, and the jackpot was $12,000,000. You can receive the $12,000,000 in equal installments over 20 years, or you can take a lump sum of $6,000,000 now. You could the lump sum to earn 8% interest, compounded annually

a.       What is the present value of the lottery winnings if taken in equal installments over 20 years?

Using present value formula to calculate the amount

PV= FV_n (1+i)^-n

FV= 12,000,000

I= 0.08

N= 20

PV= 12,000,000 ( 1 + 0.08)^-20

PV = 2,574,000

b.      Should you take the lump sum or the equal payments? WHY?

I will take the lump sum because it is worth 3,426,000 more than equal installments over 20 years

Besides, Money receive today is more valuable than receive tomorrow

Download Full answers here Money and Banking 1st tutorial -Time Has Value_