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?
N