Complete the following problems:
Scenario 1: In Las Vegas, you just won $142,000 after gambling on the Super Bowl. You want to put some money away for your child’s college education. The cost for college will total $65,000 in 18 years. You can earn 8% compounded annually. How much do you need to invest today?
Scenario 2: In 5 years, your team will need to purchase a new van for traveling to tournaments. Assume a new van costs $35,000 today and that you expect a 3% annual increase in the price of automobiles for the foreseeable future. How much must you set aside today to buy a new van 5 years hence, if you can earn 8% annually on your money?
Scenario 3: You have just won the lottery and will receive $1,500 per year forever, with the first payment to be received in one year. What is the present value of this stream of cash flows if the interest rate is 8%?
Scenario 4: A major sports team has just negotiated a contract with one of the top free agent players available this year. After months of negotiations, he signed a contract with the following terms:
1. An annual salary of $900,000 a year for four years, payable in monthly installments of $75,000 per month starting one month from now.
2. A deferred compensation package of $1,920,000, payable in monthly installments of $40,000 for four years, for services rendered during the four years of active service for the Spokane Stars. These payments commence one month after the last payment of $75,000 is made.
3. Your client, the local newspaper, contacts you to verify that the value of the contract is $4,620,000. You do some checking and find that professional athletes generally have to pay an 18% compounded monthly rate of interest on personal loans. What is the actual present value of this contract?
4. Hint: Is this an annuity problem, a lump sum problem, or both?
Scenario 5: Your team manager wants to invest a $1,250 donation received today. What is the future value of $1,250 received today if it is placed in an investment with a 6.5% annual return for 8 years?
Scenario 6: Instead of choosing to invest in a CD that provided a fixed interest rate, your team manager chose to invest the $1,250 in the stock of a sports company and purchased 100 shares at $12.50 per share. Over the year, the stock increased to $14.00 per share.
1. Did your organization have a capital gain or a capital loss?
2. How much was the capital gain (loss) in total?
3. What rate of return did you receive on the investment?
4. Assuming your team continues to receive the same rate of return for 8 years, did your team manager make a good choice to invest in the sport organization’s stock?
Scenario 7: Kevin Brown signed a $105 million contract to play baseball for the Los Angeles Dodgers on December 12, 1998. As the first player to crack the $100 million barrier, he clearly will not be pleading poverty in the near future. The contract, however, requires the payment of approximately $15 million a year for seven years. In present value terms, assuming a discount rate of 6%, how much is the contract worth?
Scenario 8: A wealthy local person loves the Bells (University of Never Land) and is willing to give the university $1,000,000 to name the basketball court Darth Vader. She is willing to give $1,000,000 today for that right or, if the school can wait two years, she is willing to give $1,100,000. Based on the current interest rate of 4.5%, how would you advise Mr. Balboa to act, and what issues should he consider when making this decision?