Time Value Of Money Application

Full Answer Section

Scenario 2: Invest the sign-on bonus

If you choose to invest the sign-on bonus, you could potentially earn $350 per year in investment income (7% of $5,000). However, you will also be taking on investment risk.

Rationale for Decision

I would personally choose to pay down my credit card debt with the $5,000 sign-on bonus. The interest rate on my credit card is very high, and paying down the debt will save me a significant amount of money in interest payments. Additionally, improving my credit score will make it easier and cheaper to borrow money in the future.

I am also young and have a long time horizon for investing. I can afford to take on more investment risk in the future, once my debt is paid off and I have a larger financial cushion.

Conclusion

I believe that paying down high-interest debt is the best financial decision for me at this time. It is a guaranteed return on investment, and it will improve my credit score. I can always start investing once my debt is paid off and I have a larger financial cushion.

Note: This is just a quantitative example to illustrate the difference between paying down debt and investing. Your individual circumstances may vary, and you should consult with a financial advisor to make the best decision for you.

Sample Solution

Quantitative Example

Assumptions:

• Sign-on bonus: $5,000
• Credit card balance: $3,000
• Interest rate on credit card: 20%
• Investment return: 7%

Scenario 1: Pay down credit card debt

If you choose to pay down your credit card debt, you will save $600 per year in interest payments (20% of $3,000). You will also improve your credit score, which can lead to lower interest rates on future loans.