1) Lex Rolf is considering two plans for building an education fund for his children.
Plan A - Invest $2,000 each year to earn 10% annually for six years.
Before making any calculations, which plan would you expect to provide the larger future amount? Calculate the future value of each plan. Which plan provides the larger amount at the end of six years?
2) Pacific Northern Corp. needs new manufacturing equipment. Two companies can provide similar equipment but under different payment plans:
a. Henderson Manufacturing offers to let Pacific Northern pay $60,000 each year for five years. The payments include interest at 12% per year. What is the present value of the payments?
b. Southern Corp. will let Pacific Northern make a single payment of $400,000 at the end of five years. This payment includes both principal and interest at 12%. What is the present value of this payment?
c. Pacific Northern will purchase the equipment that costs the least as measured by present value. Which equipment should Pacific Northern select? Why?
Plan B - Invest $100,000 now, to earn 8% annually for six years.