Question
Consider a firm with a contract to sell an asset for $220,000 seven years from now. The asset costs $75,000 to produce today. Given a
- Consider a firm with a contract to sell an asset for $220,000 seven years from now. The asset costs $75,000 to produce today. Given a relevant discount rate on this asset of 7.5 percent per year, will the firm make a profit on this asset?At what rate does the firm just break even?
- Suppose you make monthly mortgage payments of $1,345 and have 11 years left on the mortgage (next payment due next month). Assuming a 4.5% stated annual interest rate for the mortgage, how much would you need today to pay off the mortgage?
- If you make an initial contribution of $8000 to a retirement account 5 years from now and make annual contributions of $8000 thereafter, after how many contributions will your balance have reached at least $1000000 if your account earns 6% annual interest?
- Landon Lowman, star quarterback of the university football team, is thinking about forgoing his last two years of eligibility and making himself available for the professional football draft. Scouts estimate that Landon could receive a signing bonus of $1.5 million today along with a five-year contract for $3 million per year (payable at the end of the year). They further estimate that he could negotiate a contract for $5.5 million per year for the remaining seven years of his career.
The scout believe, however, that Landon will be a much higher draft pick if he improves by playing out his eligibility. If he stays at the university, he is expected to receive a $2.5 million signing bonus in two years along with a 5-year contract for $5 million per year. After that, the scouts expect Landon to obtain a five-year contract for $6 million per year to take him into retirement.
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Assume that Landon can earn a 8% return over this time. Should Landon stay or go?
5.A person plans to retire today and expects to begin living off $75,000 received annually beginning one year from now and continuing until death. The person currently has $900,000 in savings that earns 8% interest annually. Will he has enough savings to accommodate this retirement plan? Please explain.
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