Question

Question 3. Solve the following questions

(1) Fortunately, you have noticed that you win Lucky Lottery this week! However,

Lucky Lottery says that it will give you cash of $ 5,000,000 after 20 years. One of your

friends, Kim, asks you to sell your winner’s right for $ 2,000,000 today. Assuming the

annual discount rate is 5%, will you sell your right to Kim?

(2) You are planning to buy a house after 15 years. It is estimated that the value of house

will be $1,500,000 after 15 years. If your bank account gives you 8% of interest rate

compounded annually, how much must you deposit per year? (10 points)

(3) In Question 3-(2), how much must you deposit per a half of year if your bank account

gives you 7.5% of interest rate compounded semiannually?

(4) Your financial planner suggests you joining the new pension program. After 10 years,

the new program will give you $ 8,000 per year forever. To join the plan, you have to

pay $ 80,000 today. If the annual discount rate is 6%, is it rational to join this new

pension program?

(5) Suppose you have a first job today, and you are planning to save 40% of your annual

wage at the end of the year. Your first-year annual wage will be $ 50,000 and it will

grow by 5% per year. Assuming you work for 10 years in your first job, what is the

present value of your saving for 10 years? The annual discount rate is given as 8%.

Answer 1