Chap4_HW_Solutions - Fin 3322 Chapter 4 Homework 1 Your...

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Fin 3322 Chapter 4 Homework 1. Your local travel agent is advertising an extravagant global vacation. The package deal requires that you pay $5,000 today, $15,000 one year from today, and a final payment of $25,000 on the day you leave two years from today. What is the cost of this vacation in today’s dollars if the discount rate is 6%? 5,000 + 15,000/1.06 + 25,000/1.06^2 = 41,400.85 2. The tax rates are as shown. Your firm currently has taxable income of $79,000. How much additional tax will you owe if you increase your taxable income by $30,000? Taxable Income Tax Rate $ 0 - 50,000 15% 50,001 - 75,000 25% 75,001 - 100,000 34% 100,001 - 335,000 39% (100,000-79,000) = 21,000 * .34 = 7,140 (30,000 – 21,000) = 9,000 * .39 = 3,510 Tax obligation = 7,140 + 3,510 = 10,650 3. You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $50,000 today or receive payments of $641 a month for ten years. You can earn 6.5% on your money. Which option should you take and why? N = 12 * 10 I/Y = 6.5% / 12 PV = ? PMT = 641 FV = 0 PV = 56,451.91 Take the payment option as it has a higher present value 4. Your employer contributes $25 a week to your retirement plan. Assume that you work for your employer for another twenty years and that the applicable discount rate is 5%. Given these assumptions, what is this employee benefit worth to you today?
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