Question

3A) Nancy is single, is not claimed as a dependent, and has the following expenses: mortgage interest of $4760;

charitable contributions of $590; state and local taxes of $2590. What is the amount of Nancy’s itemized or
standard deduction that she can claim on her tax return? Choose the higher amount. Hint: standard deduction is
$12400
3B) Assume Debra earns $9.50 per hour. If she receives "time and a half" for any hours worked over 40per
week, how much will Debra earn if she works 50 hours this week?
3C) Assume your employer offers a bonus of $8750. The only catch is that you must wait 8 years to take
possession of the money. If you can earn 7% on your savings, what is the minimum you would take today in
order to match the bonus?
3D) Thomas has received a college scholarship and can choose whether to receive it as an immediate one-time
payment of $15500 or as a series of four equal payments (at the end of each year), each totaling $4400. Assume
that Thomas has a discount rate of 9%. Only considering TVM principles, which option is most valuable
to Thomas?

Answer 1

Nancy should take the standard deduction of $12,400. Debra will earn $522.50 for 50 hours of work at $9.50 per hour with overtime pay. To match an $8,750 bonus after 8 years at 7% interest, the present value is $5,092.39. Thomas should choose the one-time payment of $15,500 for his scholarship.

Step-by-step explanation:

The amount of Nancy's itemized or standard deduction she can claim on her tax return is $12,400, which is higher than the total of her itemized deductions (mortgage interest + charitable contributions + state and local taxes = $4760 + $590 + $2590 = $7940).

For Debra's earnings, if she works 50 hours this week, she would earn her regular hourly rate for the first 40 hours ($9.50 x 40 = $380) and 'time and a half' for the additional 10 hours (($9.50 x 1.5) x 10 = $142.50), totaling $522.50.

To match the future value of a bonus of $8,750 received in 8 years with a 7% interest rate, the present value formula is used: PV = FV / (1 + r)^n. Thus, the minimum amount one would take today is PV = $8,750 / (1 + 0.07)^8 = $8,750 / (1.718186 = $5,092.39).

For Thomas's scholarship decision, he must compare the present value of the series of four payments to the one-time payment using the discount rate of 9%. The present value of annuity formula is used: PV = Pmt x ((1 - (1 + r)^(-n)) / r). The PV of four annual payments of $4400 at 9% is $13,828.06, which is less than the immediate one-time payment of $15,500. Therefore, Thomas should choose the immediate one-time payment.