FINANCE-Ted just won the lottery, and he must choose among three award options.

Question 1:

a) 5 marks
Ted just won
the lottery, and he must choose among three award options. He can elect to receive a lump sum today of
$61m, to receive 10 end-of-year payments of $9.5 million, or to receive 30
end-of-year payments of $5.5 million.

i.
If he thinks he can earn 7%
annually, which should he choose? (2 marks)

ii.
If he thinks he can earn 9%
annually, which is the best choice? (2 marks)

iii.
Explain how interest rates
influence the award options. (1 mark)

b) 5 marks
Today is your
grandmother’s 55th birthday.
She plans to retire on her 65th birthday and wants to put
aside the same sum of money every birthday (starting today) up to and including
her 65th birthday. She then
wants to be able to withdraw $10,000 every birthday (starting from her 66th)
up to including her 85th birthday.
She believes that an interest rate of 10% per annum is a reasonable
estimate. How much does she need to put
aside on each birthday?

c) 5 marks
You borrow $50,000 repayable in monthly instalments over 10
years. The nominal interest rate is 12%
per annum. After 3 years have passed,
the lender increases the interest rate to 13.5% per annum and you are given the
choice of either increasing the monthly repayment or extending the term of the
loan. What would be the new monthly
repayment? (3 marks) What would be the
new loan term? (2 marks) (Note: students may use the following
formula to solve for n)

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d) 5 marks
Mickey is planning to
save $50,000 per quarter for 10 years.
Savings will earn interest at an (nominal) interest rate of 12% per
annum. Calculate the present value for
this annuity if interest is compounded semi-annually.