FINANCIALLY

YOURS
Assignment I

Deepak | Dharmanshu | Kishan | Sourabh

 ASSIGNMENT : TIME VALUE OF MONEY

1. You have recently won the super Jackpot in the Illinois state lottery, with a payoff
of $4,960,000.On reading the fine print, you discover that you have the following two
options:
a) You receive $160,000at the beginning of each year for 31 years. The income
would be taxed at an average rate of 28%. Taxes are withheld when the checks are
issued.
b) You receive $1,750,000 now, but you do not have access to the full amount
immediately. The $1,750,000 would be taxed at an average rate of 28%. You are
able to take $446,000 of the after tax amount now. The remaining $814,000 will be
placed in a 30 year annuity account that pays $101,055 on a before tax basis at the
end of each year.
Using a discount rate of 10 % which option should you select?
2. The mortgage on your house is 5 years old. It required monthly payments of
$1402, had an original term of 30 years, and had an interest rate of 10% (APR). In
the intervening 5 years interest rates have fallen and so you have decided to
refinance – that is, you will roll over the outstanding balance into a new mortgage.
The new mortgage has a 30 year term, requires monthly payments and has an
interest rate of 6.625% (APR).
a) What monthly repayments will be required with the new loan?
b) If you still want to pay off the mortgage in 25 years, what monthly payments
should you make after you refinance?
c) Suppose you are willing to continue making monthly payments of $1402.00, how
long will it take you to payoff the mortgage after refinancing?
d) Suppose you are willing to continue making monthly payments of $1402.00, and
want to payoff the mortgage in 25 years. How much additional cash can you borrow
today as part of the refinancing?

3. After five years Mr. Chander will receive a pension of Rs.600 per month for 15
years. How much can he borrow now (today) at 12% annual interest so that the
borrowed amount can be paid with 30% of the monthly pension amount. The interest
will be accumulated till the first pension amount becomes available
4. Ms. Ann Chen receives an annuity of $450, payable once every two years. The
annuity stretches out over 20 years. The first payment occurs at date 2, that is, two
years from today. The annual interest rate is 6%
5. What is the value of a 15 year annuity that pays $500 a year? The annuity’s first
cash flow is at the end of year 6 and the annual interest rate is 12% for years 1-5
and 15% thereafter.
6. You have decided to endow your favorite university with a scholarship. It is
expected to cost Rs.6,000 per year to attend the university into perpetuity. You
expect to give the university the endowment in 10 years and will accumulate it by
making annual (end of year) deposits into an account. The rate of interest is
expected to be 10 percent for all future time periods.
a) How large must the endowment be?
b) How much must you deposit at the end of each of the next 10 years to accumulate
the required amount?

7. Your grandmother bought an annuity from Rock Solid Life insurance Company for
$200,000 when she retired. In exchange for the $200,000, Rock Solid will pay her $
25,000 per year (beginning a year later) until she dies. The interest rate is 5%. How
long must she live after the day she retired to come out ahead (that is, to get more in
value than what she paid in)?

8. Ms. Adam has received a job offer from a large investment bank as an assistant to
the vice president. Her base salary will be $35,000. She will receive her first annual
salary payment one year from the day she begins to work. In addition, she will get an
immediate $10,000 bonus for joining the company. Her salary will grow at 4 percent
each year. Each year she will receive a bonus equal to 10 percent of her salary. Ms.
Adams is expected to work for 25 years. What is the present value of the offer if the
appropriate discount rate is 12%?