Hints 8.docx - Unit 8 1. Based on the main question for...

Unit 8
1. Based on the main question for Unit 4. There we started with a balance of $0 and added an
amount each year. Here we start with a balance of some large amount and subtract $50,000
each year.
2. Based on the main question for this unit. When we ask how good an investment the business
is, we can answer by saying what the interest rate would have to be in a simple savings
account to give the same results. That is, we just need to calculate the IRR. In this case, the
equivalent is a savings account in which we deposit $70,000, withdraw $30,000 at the end of
the first year, deposit $45,000 at the end of the second year, withdraw $40,000 at the end of
the third year, $55,000 at the end of the fourth year and $30,000 at the end of the fifth year.
The IRR is the interest rate that leaves nothing in the account after this series of transactions.
3. This is directly analogous to the first question for this unit. It’s like asking how much money
you need to retire with if you want $20,000 a year for 56 years. And note that that’s 56 years,
not 80-25=65.