1.) One real estate sales technique is to encourage customers or clients to buy today because the value of the property will probably increase during the next few years. "Buy this lot today for $28,000. In two years, I project it will sell for $32,500." The buyer has a CD worth $30,000 now, which earns 4% compounded annually and will mature in 2 years. Cashing in the CD now requires the buy to pay an early withdrawal penalty of $600.Â
Â Â Â a. ) Should the buyer purchase the land now or in two years?
Â Â Â b.) What are some of the problems with waiting to buy land?
Â Â Â c.) What are some of the advantages of waiting?
Â Â Â d.) Lots in a new subdivision sell for $15,600. Assuming that the price of the lot does not increase, how much would you need to invest today at 8% compounded quarterly to buy the lot in one year?Â
Â Â Â e.) You have inherited $60,000 and plan to buy a home. If you invest the $60,000 today at 5%, compounded annually, how much could you spend on the house in one year?
Â Â Â f.) If you intend to spend the $60,000 on a house in one year, how much of your inheritance should you invest today at 5%, compounded annually? How much do you have left to spend on a car?
2.) Barry heard in his Personal Finance class that he should start investing as soon as possible. He had always thought that it would be smart to start investing after he finishes college and when his salary is high enough to pay the bills and to have money left over. He projects that will be 5-10 years from now. Barry wants to compare the difference between investing now and investing later. A financial planner who spoke to the class suggested that a Roth IRA would be a more profitable investment over the long term than a regular IRA, so Barry wants to seriously consider the Roth IRA. When table values do not include the information you need, use the formula FV= $1(1+r)^n where R is the period rate and N is the number of periods.
Â Â Â Â a.) If Barry purchases a $2,000 Roth IRA when he is 25 years old and expects to earn an average of 6% per year compounded annually over 35 years (untill he is 60), how much will accumulate in the investment?
Â Â Â Â b.) If Barry doesn't put the money in the IRA until he is 35 years old, how much money will accumulate in the account by the time he is 60 years old? How much less will he earn because he invested 10 years later?
Â Â Â Â c.) Interest rate is critical to the speed at which your investment grows. If $1 is invested at 2%, it takes approximately 34.9 years to double. If $1 is invested at 5%, it takes approximately 14.2 years to double. Use table 10-1 to determine how many years it takes $1 to double if invested at 10%, and then at 12%.
Â Â Â Â d.) At what interest rate would you need to invest to have your money double in 10 years?
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