6. You just won the $1,000,000 jackpot of the Texas lottery. The lottery commission has asked you to choose between the next two options to receive your money. Get paid $200,000 today and $200,000 per year for the next four years, or take $800,000 today.

a. If your investment opportunity cost is 8%, which alternative would you chose?

b. What about if your investment opportunity cost were 14%?

7. An investment pays you $100 at the end of each of the next 3 years. The investment will then pay you $200 at the end of Year 4, $3000 at the end of Year 5, and $500 at the end of Year 6. If the rate of interest earned on the investment is 8 percent, what is its present value? What is its future value at the end of Year 6?

8. You are torn between two saving accounts where to put your $1,500 in scholarship money for a year until you need it for next years tuition. One is in Bank Wan and the other in C-T Bank. Bank Wan is offering a 2.5% nominal rate, with daily - 2 of 3 - compounding of interest, and C-T Bank offers 3.0% with semi-annual compounding. Which one would you chose?

9. Which savings account is better, one paying 5% with yearly compounding or one paying 4.9% with daily compounding?

10. Your brother in law is inviting you to invest some money with him. He argues that he can beat whatever return you are getting from your mutual fund. He is asking you to invest $10,000 today and promises to pay you back $15,000 in five years. If your mutual fund pays you an average annual rate of return of 8%, is your brother in law telling the truth?

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