Problem Set 2.docx

# Problem Set 2.docx - Problem Set 2 1 Mike Polanski is 30...

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Problem Set # 2 1. Mike Polanski is 30 years of age and his salary next year will be \$60,000. Mike forecasts that his salary will increase at a steady rate of 5% per annum until his retirement at age 65. a. If the discount rate is 6%, what is the PV of these future salary payments? b. If Mike saves 5% of his salary each year and invests these savings at an interest rate of 8%, how much will he have saved by age 65? c. If Mike plans to spend these savings in even amounts over the subsequent 20 years, how much can he spend each year? 2. Kangaroo Autos is offering free credit on a new \$30,000 car. You pay \$1,000 down and then \$1,000 a month for the next 30 months. Turtle Motors next door does not offer free credit but will give you \$5,000 off the list price. If the rate of interest is 5% a year, which company is offering the better deal? 3. Several years ago The Wall Street Journal reported that the winner of the Massachusetts State Lottery prize had the misfortune to be both bankrupt and in prison for fraud. The prize was \$9,420,713, to be paid in 19 equal annual installments.

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