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question 1 You are evaluating two investment opp...




question 1 You are evaluating two investment opportunities: X and Y. Investment X is expected to pay $1,200 a year for the first ten years and then $3,000 a year for the next fifteen years. Investment Y is expected to pay $4,000 a year for ten years. You find that investments of similar risk to X and Y offer returns of 10 percent and 16 percent respectively. (a)What is the value of each investment today? (b)Which investment is riskier? Why? (c)Assume that your wealthy uncle will give you a choice of Investment X or Investment Y without cost to you and that (I) you must hold the investment for its entire life or (II) you are free to sell it at its market value. Which investment would you prefer under each of the two conditions? Why? Question 2 You have $10,000 which you will invest for the next four years. You are considering the following investment alternatives: (I) Purchase units in a bond mutual fund which pays $210 interest quarterly. Assume that the interest is reinvested at the coupon rate. (II) Purchase a 4-year guaranteed investment certificate which pays 3 percent compounded monthly. (III)Invest in a stock which promises the following cash flows: Year 1 $ 0 Year 2 500 Year 3 750 Year 4 2,000 (a)Assume that at the end of year 4, you will get back your $10,000. Which investment alternative do you prefer? Why? (b)What factors, other than the rate of return, should you consider in making your investment decision? ?? Question 3 You are 30 years old today and are considering your retirement needs. You expect to retire at age 60, and expect to live to be 95. You want to move to Florida when you retire. You estimate that it will cost $300,000 to make the move ( on your 60th birthday ) and that your living expenses will be $30,000 a year, starting at age 61 and continuing through to age 95. (a)How much will you need to have saved by your retirement date to be able to reach this goal? Assume the interest rate is 8 percent. (b)You already have $50,000 in savings. You can earn 8 percent a year. How much would you need to save at the end of each year, starting a year from now, to reach your goal at age 60? (c)If you do not have any current savings and do not expect to be able to start saving money for the next five years, how much would you need to set aside each year after that to be able to reach your retirement goal? Assume an interest rate of 8 percent a year.


Paper#4027 | Written in 18-Jul-2015

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