Financial Management 2
Jones International University
Assignment 2.1
Submitted in Partial Fulfillment of the Requirements for MBA504: Financial Management
September 19, 2014
Module 2 Chapter 5 Warm-Up
E5-1
Assume a firm makes a $2,500 deposit into its money market account. If this account is currently paying 0.7% (yes, that’s right, less than 1%!), what will the account balance be after 1 year?
FV=PV X (1 + Rª)
2,500 x (1 + .007)¹= $2,517.50
E5-2
If Bob and Judy combine their savings of $1,260 and $975, respectively, and deposit this amount into an account that pays 2% annual interest, compounded monthly, what will the account balance be after 4 years?
1,260 + 975= $2,235.00= (1 + (0.02 /12)48)12 - 1
2235*(1 2%/12)^(4*12) = $2,420.99
E5-3
Gabrielle just won $2.5 million in the state lottery. She is giving the option of receiving a total of $1.3 million now, or she can elect to be paid $100,000 at the end of each of the next 25 years. If Gabrielle can earn 5% annually on her investments, from a strict economic point of view which option should she take? Using the formula for future value, it would be best for Gabrielle to take the $100,000 yr. If invested and yielding a 5% return, it will net her $2,625,000.
E5-4
Your firm has an option of making an investment in new software that will cost $130,000 today and is estimated to provide savings shown in the following table over its 5-year life:
year Savings estimate
1 $35,000
2 50,000
3 45,000
4 25,000
5 15,000
Should the firm make this investment if it requires a minimum annual return of 9% on all investments?
No because the guaranteed 9% return is not there.
Joseph is a friend of yours. He has plenty of money but little
Assignment 2.1
Submitted in Partial Fulfillment of the Requirements for MBA504: Financial Management
September 19, 2014
Module 2 Chapter 5 Warm-Up
E5-1
Assume a firm makes a $2,500 deposit into its money market account. If this account is currently paying 0.7% (yes, that’s right, less than 1%!), what will the account balance be after 1 year?
FV=PV X (1 + Rª)
2,500 x (1 + .007)¹= $2,517.50
E5-2
If Bob and Judy combine their savings of $1,260 and $975, respectively, and deposit this amount into an account that pays 2% annual interest, compounded monthly, what will the account balance be after 4 years?
1,260 + 975= $2,235.00= (1 + (0.02 /12)48)12 - 1
2235*(1 2%/12)^(4*12) = $2,420.99
E5-3
Gabrielle just won $2.5 million in the state lottery. She is giving the option of receiving a total of $1.3 million now, or she can elect to be paid $100,000 at the end of each of the next 25 years. If Gabrielle can earn 5% annually on her investments, from a strict economic point of view which option should she take? Using the formula for future value, it would be best for Gabrielle to take the $100,000 yr. If invested and yielding a 5% return, it will net her $2,625,000.
E5-4
Your firm has an option of making an investment in new software that will cost $130,000 today and is estimated to provide savings shown in the following table over its 5-year life:
year Savings estimate
1 $35,000
2 50,000
3 45,000
4 25,000
5 15,000
Should the firm make this investment if it requires a minimum annual return of 9% on all investments?
No because the guaranteed 9% return is not there.
Joseph is a friend of yours. He has plenty of money but little