1. Your younger brother has come to you for advice. He is about to enter university and has two options open to him. His first option is to study engineering. If he does this, his undergraduate degree would cost him $12,000 a year for four years. Having obtained this, he would need to gain two years of practical experience: in the first year he would earn $20,000, in the second year he would earn $25,000. He then would need to obtain his master’s degree, which will cost $15,000 a year for two years. After that he will be fully qualified and can earn $40,000 per year for 25 years.
His other alternative is to study accounting. If he does this, he would pay $13,000 a year for four years, and then he would earn $31,000 per year for 30 years.
The effort involved in the two careers is the same, so he is only interested in the earnings the jobs provide. All earnings and costs are paid at the end of the year. What advice would you give him if the applicable interest rate was 4 percent? A day later he comes back and says he took your advice, but, in fact, the applicable interest rate was 7 percent. Has your brother made the right choice?
2. Jeanie has deposited $33,000 today in an account which will earn 10 percent annually. She plans to leave the funds in this account for seven years earning interest. If the goal of this deposit is to cover a future obligation of $65,000, what recommendation would you make to Jeanie?
3. Fred has inherited $6,000 from the death of Barney. He would like to use this money to buy Wilma a new rockmobile costing $7,000 for their 10th anniversary celebration which will take place in 2 years from now. Will Fred have enough money to buy the gift if he deposits his money in an account paying 8 percent compounded semi annually?
4. Kimberly has just won a $20 million lottery, which will pay her $1 million at the end of each year for 20 years. An investor has offered her $10 million...