1. Ronald Trump tripped and fell over the sidewalk of Milwaukee's Fried Chicken [MFG]. The re$taurant chain has offEred him a monetary compensation for the accident. Ronald Can choose any one of the following alternatives: a. Alternative A - a one-time single payment of $1i}, today. Is. Alternative B - a one-time single payment of Sid in five years. c. Alternative C - an ordinary annuity of $2,50D per year over the next 5 years d. Alternative D a mixed stream of payments corresponding to the table below End of year Cash flows [alternative Cl 1 some 2 $3,50 3 $1,500 4 51.121112} Ronald can earn 3% interest on any of his investments. Which is the best alternative for Ronald? Explain. 2. Ross Fellar would like to pursue a PhD program in FaIEontc-Iogy. He is 2.5 now, but PhD programs are expensive, and he would like to start saving today. Ross estimates that his PhD program will oost $15, at the time he begins {regardless of when he decides to begin - assume the cost will not vary}. He can earn 5% interest on his investments. a. If Ross deposits $1,i] at the end of every MGMTH for the next five years, how much money will he have by the end of five years? {note that you will need to adjust it and r to aeoount for monthly oompounding]. b. How much will Ross have if he starts investing now, but decides to wait until he is 35 to start the program? c. How much more money will Ross have for the PhD program if he starts the program in 1G years as opposed to 5 years? What accounts for this difference? d. If Ross wants to start the program in 3 years, how much would he have to invest every month? Roger Fenerer wants to open a bank account at Creditor Suisse. He has $10,000 that he would like to invest today for the next 7 years. He can earn a 6% annual interest rate on his investment. a. Calculate the future value of Fenerer's investment if interest is compounded 1) annually, 2) semi-annually, 3) quarterly, and 4) monthly. b. Calculate the effective interest rate for each of the compounding frequencies. c. What is the difference between the nominal and effective interest rate? Explain. 4. Baston Consulting Group has approached your firm with an innovative program to make operations more efficient. They are calling it the "deal of the year" The program promises significant cost savings over a five-year period. These cost savings are summarized in the table below. Your firm requires a minimum annual return of 10%, and the program has a cost of $2,500,000 that your firm would have to pay upfront (today). You should invest in the new program as long as the savings it offers are greater than its cost. Should your firm invest in the program? Year Cost savings $450,000 $700,000 $850,000 $600,000 $400,000 5. Warren Buffer would like to take out a $120,000 loan to buy a house. The bank has offered him an 8.5% interest rate, and he will repay the loan by making equal annual payments over the next six years (note that the first payment occurs at the end of the first year). a. Determine Warren's annual loan payment. b. Prepare an amortization table for Warren's loan. c. How much did Warren pay in total interest expense for the loan
