solution

Lump Sum Investing:
i. A graduate student has $1,000 of which she do not want to consume immediately. She wants an earning on the principal given that in 6 years’ time she would take a holiday at which point she would liquidate the savings. A nearby savings company offers her the following options:
a. Non-compounding annual return of 9.5%
b. 8.2% compounding annually
c. 8% compounding quarterly
Since the student requires the highest future value (FV), which is essentially the highest annual yield, which of the options would you recommend? Justify your recommendation, Give the rationale for each option.
Rationale (a)—-
(b) ——
(c)——-
Choice is _______?

ii. Based on the utterance of Albert Einstein re “the power of compounding being the most powerful force in the universe” the indigenous people sold the Manhattan Island to the Dutch for $24.00 in the year 1625. Validate the Einstein statement one way or the other:
(a) Value the island (FV) today using a non-compounding (simple interest) of
20% (let N= 25,50,75 years)
(b) Value the island at an annual compounding of 5% (let N = 25, 50, 75 years)
(c) Write your observation about (a) and (b) and validate Einstein utterance one way or the other
……………………………………………………………………………………………………………..

iii. You wish to purchase a truck for you CA project valued at $40,000. You currently own a car that has a trade in value of $10,000 which you would exchange for the higher valued truck. The truck dealer agrees to finance the difference at an annual rate of 8.00% based upon a quarterly repayment schedule over a 5-year period.
a. Rounding to nearest whole $, what is your quarterly repayment amount
$ _________
b. Using the format below fill in the data and give the outstanding principal at the end of the second payment:
$ __________