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Lab 8 - 7

Lab 8 - 7. Which is the Best Option?. Objectives. Use the financial models developed in this chapter to solve problems. Vocabulary. None new. Lab Activity.

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Lab 8 - 7

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  1. Lab 8 - 7 Which is the Best Option?

  2. Objectives • Use the financial models developed in this chapter to solve problems

  3. Vocabulary • None new

  4. Lab Activity Each of the following problems presents a financial situation in which you must select the best option. Work with a group and be prepared to: • Present your findings to the class • Presentations must include: • Any tables, equations or graphs used in solving problem • Comparison of the bottom lines for each option

  5. Situation One You are 25 years old and begin to work for a large company that offers you two different retirement options. Assume you work to 65 years old. Option One: You will be paid a lump sum of $20,000 for each year you work for the company Option Two: The company will deposit $10,000 annually into an account that will pay you 12% compounded monthly. When you retire, the money will be given to you. Which option is best? Explain.

  6. Situation One Solution You are 25 years old and begin to work for a large company that offers you two different retirement options. Assume you work to 65 years old. One: $800,000 (40 years @ 20K per year) Two: $9,831,002.49 Which option is best? Option two is much better because of the long time and the compounding.

  7. Situation Two Congratulations! You have just won $50,000 in the state lottery. You decide to invest half of the money into a savings account, in order to start you own business when you graduate from college. You have 3 options: Option One: Open a savings account that pays 6.5% simple interest Option Two: Open a savings account that pays 3% interest compounding annually Option Three: Open a savings account that pays 2.7% interest compounded daily Which option is best? Explain.

  8. Situation Two Solution Congratulations! You have just won $50,000 in the state lottery. You decide to invest half of the money into a savings account, in order to start you own business when you graduate from college. You have 3 options: One: $33,125 value in 5 years $8,125 interest earned Two: $28,981.85 value in 5 years $3,981 interest Three: $28,613.28 value in 5 years $3,613 interest Which option is best? Option one yields the most money in 5 years (time to finish senior year and college).

  9. Situation Three You have just purchased a new computer at a local electronics store for $2400. You have two options to pay off the purchase: Option One: Apply for a store credit card and make payments of $150 per month until paid off. Assume you will make no additional purchases using the card and that there is no annual fee. Interest on the card is 1.5% per month. Payment is due at the beginning of each month. Option Two: Apply for a fixed installment loan of $2400 at 6.55% APR for two years. Which option is best? Explain.

  10. Situation Three Solution You have just purchased a new computer at a local electronics store for $2400. You have two options to pay off the purchase: One: Internet: 19 months to pay it off with $366 in interest for a total of $2766. Calculator: 18.12 months to pay it off with $218 in interest for a total of $2718. Two: Internet: 107.07 per month for 24 months. $169.68 in interest for a total of $2569.68. Calculator: $106.39 per month for 24 months. $153.36 in interest for a total of $2553.36. Which option is best? Option Two allows lower monthly payments and total paid out.

  11. Summary and Homework • Summary • Sort out the relevant information and organize it. • Determine the costs and benefits of each option • Determine which option is best • Homework • none

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