Question 1: John Smith has received a $1,000,000 gift from his grandmother. Below are two alternatives for investment. Calculate the current value of each. Which investment should John choose and why?
A. Invest in a one year government security yielding 5%.
B. Invest in real estate with some risk. John has found a piece of property for $1,000,000 that is forecasted to be worth $1,100,000 after one year.
Question 2. Tom Jones is 65 years of age and has a life expectancy of 12 more years. He wishes to invest $20,000 in an annuity that will make a level payment at the end of each year until his death. If the interest rate is 8%, what income can Mr. Jones expect to receive each year?
Question 3. Evaluate the three investment opportunities for bonus of $1,000 you just received. Find the values at 1 year, 5 years, and 20 years. Indicate which opportunity is the best for each of time periods.
A. An account paying 12% interest compounded annually.
B. An account paying 11% interest compounded semi-annually.
C. An investment that will pay you 14% annual interest only at the end of the investment period. of 1 year, 5 years, or 20 years.