Problem 1: Kade Gulliver turned 20 years old today. His grandfather established a trust fund that will pay Mr. Gulliver $60,000 on his next birthday. However,l Mr. Guliver needs money today to start his college education. His father is willing to help and has agreed to give Mr. Gulliver the present value of the future cash inflow, assuming a 10 percent rate of return.
a) Use a present value table to determine the amount of cash that Mr. Gulliver's father should give him.
b) Use an algebraic formula to prove that the present value of the trust fund (the amount of cash computed in Requirement a) is equal to its $60,000 future value.
Problem 2: Qunitana Pena expects to receive a $500,000 cash benefit when she retires five years from today. Ms. Pena's employer has offered an early retirement incentive by agreeing to pay her $300,000 today if she agrees to retire immediately. Ms Pena desires to earn a rate of return of 12 percent.
a) Assuming that retirement benefit is the only consideration in making the retirement decision, should Ms. Pena accept her employer's offer?
b) Identify the factors that cause the present value of the retirement benefit to be less than $500,000.