PS 4 Solutions - future values See above 3 How much money...

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Economics 1 Sections 114-117 Problem Set 4 : Present Value Instructor: Professor Gunter TA: Christopher Zwicker Jerry is a Freshman who is planning to take an exciting adventure trip to Iceland after graduation. To afford airfare, 10 nights lodging and all the excursions he wants to do in Iceland, it will cost him $2700. He has saved up $2250 from working at Target the summer before college. The local bank offers a .5% MPR (Monthly percentage rate) to students at Lehigh (which is = 6% Annual Percentage Rate). Future Value(n) Present Value = -------------------------- n=number of time (1+ interest rate)^n periods considered 1) If Jerry were to put all his money in the bank on October 1 st , 2006, would he have enough to take this trip to Iceland, which departs June 1 st , 2010? N= 3 years and 8 months = 44 months Yes, 2250*(1+.005)^44 = $2802.14 > $2700 (cost of trip) 2) What is the formula you used to calculate this answer? What is the general formula for comparing present and
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Unformatted text preview: future values? See above 3) How much money will Jerry have left over (if any) for spending money if he doesn’t work at all between now and June 1 st , 2010? 2802.14 – 2700 = $102.14 Economists predict the price of all goods will increase by 15% between October 2006 and June 2010. The local bank has also suddenly decided to increase its APR to 7.5% (MPR = .625%) on October 1 st , 2006. 4) Jerry will now not have enough for his trip. How much will he be short on June 1 st , 2010? NEW COST = 2700*(1+.15) = $3105 NEW FUTURE VALUE = 2250*(1+.00625)^44 = $2959.66 3105 – 2959.66 = $145.34 (short by this amount) 5) If Jerry’s mother contributes $150 to Jerry’s trip on October 1 st , 2006, will he now have enough for the trip? YES, 2400(1+.00625)^44 = $3156.97 ( > cost of $3105) 6) If Jerry’s mother waited until June 1 st , 2010 to give him this $150, would he have enough for the trip? YES, $150 > $145.34, the amount he was short...
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