1. Darius worked in a union motorcycle factory for 20 years before returning to school to become a paramedic instead. He is 45 now. He has a pension from his previous employer, which would pay him $1500/month after his retirement at 65. Assuming he will live to 80 (which is slightly higher than the life expectancy for an American man), he would earn $270,000 over 15 years. The company has stopped offering pensions and wants to buy out his pension today. Should Darius accept a buyout offer of $125,000? Assume that he could invest the money at an interest rate of 3% with monthly compounding. HINT: Think about what happens if he invests, and then saves 50% (reinvesting that from age 65-80) (2 points. 1 for answer, 1 for explanation)

2. Sam and Nadia just inherited $150,000 from Nadias grandmother. This is exactly the amount of principal remaining on their mortgage. They are wondering: Should they pay off the mortgage or keep making their monthly payments and invest the money in an S&P Index fund? They have a 30-year mortgage at 4% interest, and they have 16 years remaining to pay. They pay $1000/month in principal and interest payments. Assume they could earn about 6% annual interest on an investment, which would compound monthly.

3. Why is $100 a year from now not worth the same amount as $100 today?

4. If the interest rate on investments rises, what happens to the future value of $100 in your pocket today?

5. If the interest rate on investments rises, what happens to the present value of $100 you would earn a year from now?

6. What is one situation in which it would be helpful to use time value of money calculations?