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Homework 3 Solutions
1.
1000(1 1/(1 + 7%))100
7%
= 14269.25
PV =
2.
PV =
X
i=1
1
(1 + 8%)5i
1
(1 + 8%)5 1
= 2.13
i.e., the present value of your gift is $2.13 million.
3. (a) The cash flow is (0, 1200, 1200, . . . , 1200), where n = 18.
The amount I have to pay (at year 12) is P V =
$12993.12.
1200
1+0.06
1200
1.062
+ ... +
1200
1.0618
1200
1.062
+ ... +
1200
1.0610
(b) The cash flow is (0, 1200, 1200, . . . , 1200), where n = 10.
The amount I have to pay (at year 20) is P V =
$8832.10.
1200
1+0.06
(c) The cash flow is (1200, 1200, 1200, . . . , 1200), where n = 18.
1200
1200
1200
The amount I have to pay (at year 12) is P V = 1200 + 1+0.06
+ 1.06
2 + . . . + 1.0618 =
$14193.12.
4. First note that the savings in year 1 is 1000, in year 2 is 1000 0.98, in year 3 is
1000 0.982 , etc.
10000.98
10000.982
1000
0.98
0.98 2
Then P V = 1000
+
+
+.
.
.
=
1
+
+
+
.
.
.
= 14285.71.
1.05
1.052
1.053
1.05
1.05
1.05
5. Note that we want the PV of this cash flow to be 0: (50000, 0, x, 0, x, . . . , 0, x).
P V = 50000 +
x
1.042
x
1.044
+ ... +
x
1.0420
= 0.
25K
25K
25K
+
+ ... +
>0
2
1.05 1.05
1.05n
Using the geometric series to simplify terms; after some algebraic manipulations, we
obtain n > 10.47.
So another 11 (or more) joyous years on Earth is preferable.
7.
500
= 10000
(1 + rm )i
6050
= 10000
(1 + EARb )i
100
1+r
100
(1+r)2
+ . . . = 0.
Simplifying the above using the geometric series formula, and solve for r, I get r = 0.1.