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Homework answers / question archive / Betty Kay has a contract in which she will receive the following payment for the next 5 year: $1,000, $2,000, $3,000, $4,000 and $5,000
Betty Kay has a contract in which she will receive the following payment for the next 5 year: $1,000, $2,000, $3,000, $4,000 and $5,000. She will then receive an annuity of $8,500 a year for the end of the 6th through the end of the 15th year. She is offered a $30,000 to cancel the contract. If the payments are discounted at 14 percent should she cancel the contract? Show all workings.
. Maryann is planning a wedding anniversary gift of a trip to Hawaii for her husband at the end of 5 years. She will have enough to pay for the trip if she invests $5,000 per year until that anniversary and plans to make her first $5,000 investment on their first anniversary. Assume her investment earns a 4 percent interest rate, how much will she have saved for their trip if the interest is compounded in each of the following ways?
a. Annually b. Quarterly c. Monthly
Do not cancel the contract as payments have higher present value compared to $30,000.
Computation of Future values at the end of year 5 in the following scenarios:
a. Interest is Compounded Annually:
=$5,000*(1.04^5-1)/4%
=$27,081.6128
b. Interest is Compounded Quarterly:
=$5000/(1.01^4-1)*((1+4%/4)^20-1)
=$27,114.32195
c. Interest is Compounded Monthly:
=$5000/((1+4%/12)^12-1)*((1+4%/12)^60-1)
=$27,121.77523
