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1. Your parents set up a bank account in your name when you were born with an initial investment of $5,000. You are turning 21
1. Your parents set up a bank account in your name when you were born with an initial investment of $5,000. You are turning 21 in a few days and will have access to all funds. The account was earning 7.3 percent for the first seven years; then the rates went down to 5.5 percent for six years. The economy was doing well at the end of the 1990s and your account was earning 8.2 percent for three years in a row. Unfortunately, the next two years you earned only 4.6 percent. Finally, as the economy recovered, your return jumped to 7.6 percent for the last three years. What would be the balance now if your parents made another deposit of $1,200 at the end of year 7? 2. Cedric Benson, a top five draft pick of the Chicago Bears and his agent are evaluating three contract options. In each case there is a signing bonus and a series of payments over the life of the contract. He uses a 10.25 percent rate of return to evaluate the contracts. Year Cash Flow Type Option A Option B Option C $3,100,00 $4,000,00 $4,250,00 0 Signing Bonus 0 0 0 1 Annual Salary $650,000 $825,000 $550,000 2 Annual Salary $715,000 $850,000 $625,000 3 Annual Salary $822,250 $925,000 $800,000 $1,250,00 4 Annual Salary $975,000 0 $900,000 $1, 100,00 $1,000,00 5 Annual Salary 0 0 $1,250,00 6 Annual Salary 0
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