Assignment 2.1

E5-1
Assumed a firm makes a $2,500 deposit into its money market account. If this account is currently paying 0.7% (yes, that’s right, less than 1%!), what will the account balance be after 1 year?

The answer is $2,517.5

E5-2
If Bob and Judy combine their savings of $1,260 and $975, respectively, and deposit this amount into an account that pays 2% annual interest, compounded monthly, what will the account balance be after 4 years?

The answer is $2,419.2358

E5-3
Gabrielle just won $2.5 million in the state lottery. She is giving the option of receiving a total of $1.3 million now, or she can elect to be paid $100,000 at the end of each of the next 25 years. If Gabrielle can earn 5% annually on her investments, from a strict economic point of view which option should she take?

If Gabrielle decided to take the lump sum of $1.3 million and invest it all for 1 year she would have $13,650,000.
If Gabrielle decides to take the $100,000 at the end of each year and invest it for the next 25 years she could have at the end $3,386,354.
I would invest the lump sum of $1.3 million for one year and make $13,650,000.

E5-4
Your firm has an option of making an investment in new software that will cost $130,000 today and is estimated to provide savings shown in the following table over its 5-year life:

year Savings estimate
1 $35,000
2 50,000
3 45,000
4 25,000
5 15,000

Should the firm make this investment if it requires a minimum annual return of 9% on all investments?

I personally believe the company should not make this investment and explore different