Economics Decision Making 2: Time Value of Money, Trade-offs, Taxes

This economics assignment explores key concepts in personal finance and decision-making. It begins with an analysis of the time value of money, comparing different savings products like checking and savings accounts, and certificates of deposit, calculating their future values over different time horizons. The assignment then delves into the impact of compounding interest, demonstrating how different compounding frequencies affect the growth of investments. Furthermore, it examines cost of credit, opportunity cost, and trade-offs, using loan scenarios to determine the most financially sound decisions, considering interest rates and the potential gains from alternative investments. Finally, the assignment addresses income taxes, defining taxable income, adjusted gross income, tax deductions, exemptions, and tax credits, providing a comprehensive overview of tax-related concepts.

Running Head: Economics Decision Making
Time Value of Money, Trade-offs, and Income Taxes
Student Name
Institutional Affiliation
Course/Number
Instructor Name
Due Date

Economics Decision Making 2
Time Value of Money, Trade-offs, and Income Taxes
Scenario 1: Time Value of Money / Cash Management Products
Question 1
Product Annual
Interest
Rate
Restrictions/Fees
on Product Usage
FV at end of Year 1 FV at end of Year 5
Checking
Account
0.00%  No minimum
 No limit on
withdrawals
Answer:
$2000.00
Inputs:
Interest Rate per Time
Period:
Number of Time
Periods:
Present Value:
Answer:
$2000.00
Inputs:
Interest Rate per Time
Period:
Number of Time Periods:
Present Value:
Savings
Account
1.50%  No minimum
 Limited to 3
withdrawals per
month
Answer:
$2030.00
Inputs:
Interest Rate per Time
Period:
Number of Time
Periods:
Present Value:
Answer:
$2154.57
Inputs:
Interest Rate per Time
Period:
Number of Time Periods:
Present Value:
Certificate
of Deposit
5%  $500 minimum
balance
 Early withdrawal
Answer:
$2100.00
Answer:
$2552.56

Economics Decision Making 3
(CD) penalty: 180
days of interest
plus $25
Inputs:
Interest Rate per Time
Period:
Number of Time
Periods:
Present Value:
Inputs:
Interest Rate per Time
Period:
Number of Time Periods:
Present Value:
Question 2
I would choose Certificate of Deposit (CD). The reason is that inflation is bound to rise in the
course of the next years and I need a high return to cover for the same. CD has strict restrictions
and fees and thus I will not be tempted to dip into my savings.
Scenario 2: Time Value of Money / Compounding Interest
Question 3
Annual
Interest
Rate
Interest
Compounde
d
FV at the end of
Year 5
FV at the end of
Year 10
FV at the end of Year
30
2.00% Annually Answer:
$11,040.81
Answer:
$12,189.94
Answer:
$18,113.62
2.00% Quarterly Answer:
$11,048.96
Answer:
$12,207.94
Answer:
$18,193.97

Economics Decision Making 4
8.00% Annually Answer:
$14,693.28
Answer:
$21,589.25
Answer:
$100,626.57
8.00% Quarterly Answer:
$14,859.47
Answer:
$22,080.40
Answer:
$107,651.63
Question 4
The impact of compounding interest is an increase in the value of the money saved. The more the
compounding periods the higher the increase in value. This explains why the value of $10000
compounded quarterly is greater than the same amount compounded annually at the same rate of
interest.
Scenario 3: Cost of Credit / Opportunity Cost / Trade-Offs
Question 5
Loan
Amount
Interest
Rate
Term Monthly Loan Payment =
Amount Borrowed divided
by “Table Factor in Exhibit
1-D” divided by 12
Total Amount of Interest =
(Monthly Loan Payment * Term *
12) - Loan Amount
$7,500 6% 3 years Example:
7500/2.673=2,805.84
2,805.84/12= 233.82
Example:
(233.82*3*12) - 7,500= 917.52
$7,500 6% 5 years 7500/4.212=1780.63
1780.63/12=148.39
(148.39*5*12) – 7500= 1403.13
$10,000 6% 5 years 10000/4.212=2374.17
2374.17/12=197.85
(197.85*5*12) – 10000= 1870.85
$15,000 6% 5 years 15000/4.212=3561.25 (296.77*5*12) – 15000= 2806.27

Economics Decision Making 5
3561.25/12=296.77
Question 6
I would choose the first option because I’ll pay the least total amount of interest by foregoing
the small interest rate my money would gain by staying in the money market. In the first and
second option, there is no money available in the money market since its full withdrawn.
However, the duration for the 1st option payment is less and thus attracting a small interest
payment. Using the simple savings calculator, the future value of $2500 for the 3rd option
compounded annually at a rate of 1% for 5 years is $2,627.53. This is at a gain of value by
$2,627.53 – 2500 = 127.53. On the other hand, the value of $7500 for the 4th option after 5 years
at the same interest rate of 1% compounded annually is $7,882.58. This is at a gain of value by
$7,882.58 – 7500 = 382.58.
In the third option, $2500 is available since the amount withdrawn from the money market to
complete the car payment is $5000. The $2500 gains an interest of 127.53; deducting this interest
from the total amount of interest for the 3rd option 1870.85 – 127.53 = 1743.32. For the 4th
option, $7500 is available in the money market since there is no withdrawal made. The gain in
interest for 5 years is 382.58. Deducting this from the total interest paid in the 4th option
$2806.27 – 382.58 = $2423.69.
Question 7
Opportunity cost is the gain foregone is order to make a greater gain. I make this decision
because from the above situation, I was forced to withdraw all the money in the money market
and forego a 1% annual interest gain. By doing this, I managed to pay an interest rate lower than
what I would have paid if I decided to take a full loan of $15000 to purchase the car and continue
holding my savings in the money market.
Income Taxes
Question 8
Taxable income is that income arrived at after adding all incomes and then subtracting
expenses and deductions that have been allowed by a country’s income tax rule (Olivia, 2011).

Economics Decision Making 6
On the other hand, adjusted gross income is the total of all incomes less some specific items
mentioned in the taxation law (Bowlin, 2018). Taxable income is obtained by subtracting
expenses and deductions form the adjusted gross income which is considered a standard base.
Thus, taxable income is less than the adjusted gross income.
Question 9
Tax deductions are reductions of income to arrive at taxable income, exemption is a
reduction of taxable income that has been provided by the country’s law. Both tax deduction and
exemption reduces the taxable income. Tax credit is the amount of tax reduced from the tax
owed to the government by the tax payers. Tax credit thus is a reducer of tax itself.
References

Economics Decision Making 7
Bowlin, K. (2018). The Difference between Federal Taxable Income and Federal Adjusted
Gross Income. Smallbusiness.chron.com. Retrieved 14 January 2018, from
http://smallbusiness.chron.com/difference-between-federal-taxable-income-federal-
adjusted-gross-income-18066.html.
Olivia. (2011). Difference between Taxable Income and Adjusted Gross Income.
Differencebetween.com. Retrieved 14 January 2018, from
http://www.differencebetween.com/difference-between-taxable-income-and-adjusted-
gross-income/.