Assignment:
Identify the flaw in the following argument: Companies that offer free lunches to their workers find that worker productivity (output hour is 10 percent higher. Clearly eating a free lunch improves morale and makes workers work harder. If two companies were identical apart from the fact that one offered free lunches, which company would attract more capableworkers? (You will want to use a spreadsheet for this problem for example, Microsoft Excel.) Doug is a recent high school graduate considering three careers that involve flowing water. He can begin work immediately at the municipal Water Department, which would pay him (in real terms) S30,000 each year for the next 45 years. A second choice is to spend five years in college, with an annual tuition of $25,000 per year, and become a civil engineer, this would allow him to earn $55,000 per year for the 40 years after he graduates. The final option is to get the same ivil engineering degree Gust as before), spend the following 5 years getting a Ph.D. in hydrology (with no tuition and a $15,000 annual fellowship), and then work for 35 years as a groundwater specialist who earns $75,000 peryear. If the interest rate were 7 percent, which option would Doug choose? Use a spreadsheet program our choice Excel ste to perform your calculations, and attach the output of that exercise. The top line of your output should look like the following. Remember to start in Year 0 (i.e., the first payments are made and/or received immediately, not one year from today) and end in Year 44 Option 1 Option 1 Option 2 Option 2 Option 3 Option 3 Present Value Earnings Present Value Earnings Year Earnings Present Value b. Would Doug changenhis mind if a new act of Congress limited fellowships for graduate students to $9000 per year? c. How would that decision change if the interest rate rose to 8 percent? (Use the original $15,000 fellowship value here.) Write at least 2 sentence to explain why the change in Dougs decision makes intuitive sense from a financial point of view. Mention what else Doug might do with the money he had saved for tuition payments A major league baseball player is trying to decide whether to sign a contract with the Washington Nationals or the Baltimore Orioles. (No, you dont need to know anything about baseball to answer this question!) This player does not care which team he plays for, merely how much money he will earn. In the terms in which such contracts are usually discussed in the news media, the Orioles are offering more money, $10 million over two years versus the Nationals offer of $8 million over two years. However, we know that this is not a good way to discuss the value of contracts because it depends on when the money is to be paid. In fact, the Nationals offer includes more money up front than does the Orioles offer. The Nationals offer includes a $2 million signing bonus (paid today), $3 million paid at the end of the current season (consider it to be one year from today), and $3 million paid at the end of the next season. Meanwhile, the Orioles offer a $1 million signing bonus now, $2 million at the end of the next season, $3 million at the end of the following season (so three years from now), plus a deferred payment of S4 million dollars 10 years from now Compute the present value of both contracts ifthe interest rate is 5 percent. Which team makes the better offer? What if the interest rate were 10percent? Identify the flaw in the following argument: "Companies that offer free lunches to their workers find that worker productivity (output/hour) is 10 percent higher. Clearly eating a free lunch improves morale and makes workers work harder." If two companies were identical apart from the fact that one offered free lunches, which company would attract more capable workers? (You will want to use a spreadsheet for this problem-for example, Microsoft Excel.) Doug is a recent high school graduate considering three careers that involve flowing water. He can begin work immediately at the municipal Water Department, which would pay him (in real terms) dollar 30,000 each year for the next 45 years. A second choice is to spend five years in college, with an annual tuition of 525,000 per year, and become a civil engineer; this would allow him to earn dollar 55,000 per year for the 40 years after he graduates. The final option is to get the same civil engineering degree (just as before), spend the following 5 years getting a Ph.D. in hydrology (with no tuition and a dollar 15,000 annual fellowship), and then work for 35 years as a groundwater specialist who earns 575,000 per year. If the interest rate were 7 percent, which option would Doug choose? Use a spreadsheet program (your choice-Excel, to perform your calculations, and attach the output of that exercise. The top line of your output should look like the following. Remember to start in Year 0 (i.e., the first payments are made and/or received immediately, not one year from today) and end in Year 44. Would Doug change his mind if a new act of Congress limited fellowships for graduate students to dollar 59000 per year? How would that decision change if the interest rate rose to 8 percent? (Use the original dollar 15,000 fellowship value here.) Write at least 2 sentences to explain why the change in Doug's decision makes intuitive sense from a financial point of view. Mention what else Doug might do with the money he had saved for tuition payments. A major league baseball player is trying to decide whether to sign a contract with the Washington Nationals or the Baltimore Orioles. (No, you don't need to know anything about baseball to answer this question!) This player does not care which team he plays merely how much money he will earn. In the terms in which such contracts are usually discussed in the news media, the Orioles are offering more money, dollar 10 million over two years versus the Nationals' offer of dollar 8 million over two years. However, we know that this is not a good way to discuss the value of contracts because it depends on when the money is to be paid. In fact, the Nationals' offer includes more money "up front" than docs the Orioles' offer. The Nationals' offer includes a dollar 2 million signing bonus (paid today), dollar 3 million paid at the end of the current season (consider it to be one year from today), and dollar 3 million paid at the end of the next season. Meanwhile, the Orioles offer a SI million signing bonus now, dollar 2 million at the end of the next season, dollar 3 million at the end of the following season (so three years from now), plus a deferred payment of dollar 4 million dollars 10 years from now. Compute the present value of both contracts if the interest rate is 5 percent. Which team makes the better offer? What if the interest rate were 10 percent?