Finance Assignment
Instructions: All compounding/discounting should be done using PV/FV functions in Excel.
1) You have won the lottery and have 3 choices. You can choose to receive $1,000,000 immediately in cash. Your second option is to receive a single payment of $2,000,000 at the end of 15 years. Your third option is to receive payments of $100,000 a year for 15 years. Which option should you choose if your discount rate is 9%? Why?
2) Bruce Sprungsteen is a washed up rock star. He has a recording contract that will pay him $5,000,000 each year for the next 3 years. Since Bruce is no longer cool, the recording company want to cancel his contract. To encourage Bruce to cancel, the recording company offers him an immediate payment of $13,000,000 - if he accepts that amount, he will not receive the 3 payments of $5,000,000. If he does not accept the $13,000,000. He is legally entitled to the 3 payments under the contract. So he needs to choose one or the other. If Bruce's discount rate is 9%, which should he choose? Why?
3) You are planning to deposit $100,000 into a bank account and to leave the funds on deposit for 12 years. Bank A pays interest at a rate of 3%, compounded annually. Bank B pays interest at a rate of 2.5%, compounded semiannually. Bank C pays interest at a rate of 2.2% compounded daily.
a) If you put your money into Bank A, how much will you have in the account after the 12 years?
b) If you put your money into Bank B, how much will you have in the account after the 12 years?
c) If you put your money into Bank C, how much will you have in the account after the 12 years?
d) What factors contribute to the difference in the amounts in a, b and c? Explain.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.