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HW03-EE366-Soln-4thEd

# HW03-EE366-Soln-4thEd - HW 3 EE366 McCann Park 4th Edition...

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HW 3 EE366 McCann Park – 4 th Edition Problem 1: First find the weekly interest rate. \$500 = \$58.62(P/A,i w ,10) (P/A,i w ,10) = 500/58.62 = 8.53; or \$58.62 = \$500(A/P,i w ,10) (A/P,i w ,10) = 58.62/500 = 0.117 Look on the row for 10 periods in the tables in Appendix A and you will find that these values correspond to 3% interest. The nominal annual interest rate, r = 52 x i w = 52 (0.03) = 156% The effective annual interest rate = (1+i w ) 52 – 1 = (1.03) 52 – 1 = 365% Obviously, a weekly interest rate of 3% corresponds to a very high effective annual interest rate. Very high effective annual interest rates are not uncommon for small short term loans from “payday” lenders or pawn shops; although, I made-up this example and it may not correspond to reality. 4.6: For the 24 month lease: P = \$2,500 + 520 + 520(P/A, 0.5%, 23) + 500 – 500(P/F, 0.5%, 24) = \$14,348 For the up-front lease: P = \$12,780 + 500 – 500(P/F, 0.5%, 24) = \$12,836 At 6% interest, the up-front lease is preferred. Note: You could ignore the security deposit entirely since it is identical for the two alternatives.

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HW03-EE366-Soln-4thEd - HW 3 EE366 McCann Park 4th Edition...

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