AGRICULTURAL ECONOMICS 330



AGRICULTURAL ECONOMICS 330

Assignment 2

Instructor: Dr. David J. Leatham

Name: Seat Number: Section:

NOTE: SHOW A TIME LINE AND THE PRESENT VALUE OR FUTURE VALUE FORMULA USED TO SOLVE EACH PROBLEM. NO POINTS WILL BE GIVEN WITHOUT A TIME LINE AND FACTORS EVEN IF YOU HAVE THE RIGHT ANSWER!

(If your answer does not match the answers given below, check with the instructor. There is always the chance, albeit small, that your answer is correct and there is a typo below.)

1. If you wished to withdraw $40,000 in 5 years to buy a Mercedes, how much money would you need to deposit today in Citizens Savings Bank if they pay 12 percent interest (compounded monthly) (use a calculator)? (Answer = $22,018)

2. Show the relationship between present and future value by solving the following:

A. What is the present value of an investment that offers payments of $6,000 at the end of year 1; $4,000 at the end of year 2; and $2,000 at the end of year 3 if money can be invested at 9 percent? (Answer = $10,415.67)

B. How much money would be in the bank at the end of 3 years if the proceeds from an investment that offers payments of $6,000 at the end of year 1; $4,000 at the end of year 2; and $2,000 at the end of year 3 were deposited in a savings account that paid 9 percent interest? (Answer = $13,488.6)

C. What is the present value of an investment that offers one payment of $13,488.60 at the end of year 3 if money can be invested at 9 percent? (Answer = $10,415.67)

3. If you had $15,421 to deposit today in Citizens Savings Bank at 10 percent (compounded annually), how many years would you have to wait before you could pay $40,000 in cash for a new Mercedes? (Answer = 10 years)

4. If you had $24,836.85 to deposit today in Citizens Savings Bank and wanted to pay $40,000 cash for a new Mercedes in 5 years, what annual interest rate (compounded annually) would the bank have to pay? (Answer = 10%)

5. If you took out a $10,000 loan (education loan) today from citizens Savings Bank at 12 percent (compounded annually) and don't have to pay it back for 20 years,

A. How much money would you owe the bank in 20 years? (Answer = $96,462.93)

B. How much money would you owe the bank if the interest was compounded monthly (use a calculator)? (Answer = $108,925.53)

C. How much more interest would you pay if interest is compounded monthly (part C) rather than compounded annually (part A)? (Answer = $12,462.60)

6. You have just won the Texas Lottery which provides four alternative methods and amounts of payments. You can choose to receive:

A1 = $64,000 per year for 10 years with payments to be received at the end of each year;

A2 = $240,000 now and then $240,000 at the beginning of the sixth year;

A3 = $380,000 now; or

A4 = $990,000 ten years from now.

Problem:

A. Find the present value of each of the four alternatives and rank these four alternatives from first choice to last choice if you have an investment opportunity paying 13% annually. (Answer = A3=$380,000; A2=$370,262; A1=$347,279; A4=$291,642)

B. Rank these alternatives if your only investment opportunity earns 6%. Does the ranking change?

7. Terry's father loaned her $15,000 for college expenses. Terry agreed to repay the $15,000 in a lump sum 5 years after graduation. No interest was to be charged. Terry, who is now a senior, has the prospects of marrying a rather wealthy man and wishes to repay the loan on graduation day. Assuming that father can invest the money at 12% interest, how much should he be willing to accept on graduation day rather than waiting 5 years for his money? (Answer = $8,511.40)

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