HW#1.pdf - ECON3347 FALL 2019 Homework 1 Answer Key 1 As winner of a breakfast cereal competition you can choose one of the following prizes a \$100,000

# HW#1.pdf - ECON3347 FALL 2019 Homework 1 Answer Key 1 As...

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ECON3347 FALL 2019 Homework 1 Answer Key 1. As winner of a breakfast cereal competition, you can choose one of the following prizes: a. \$100,000 now. b. \$180,000 at the end of five years. c. \$11,400 a year forever. d. \$19,000 for each of 10 years. e. \$6,500 next year and increasing thereafter by 5% a year forever. Assume that discount rate is 12%. i. (20 pts) Write down the discounted cash flow equation for each option. a. PV= \$100,000 b. ࠵?࠵? = \$%&&&& \$.\$( ) = \$102,136.83 c. ࠵?࠵? = \$\$2&& \$.\$( + \$\$2&& \$.\$( 4 + ⋯ = \$\$2&& &.\$( = \$95,000 d. ࠵?࠵? = \$8&&& \$.\$( + \$8&&& \$.\$( 4 + ⋯ + \$8&&& \$.\$( 9: = \$107,304.24 e. PV = =>&& \$.\$( + =>&&(\$.&>) \$.\$( 4 + ⋯ = =>&& &.\$(A&.&> = \$92,857.14 ii. (10 pts) Decide which prize you should choose and why? Option D has the highest PV, so I choose D. 2. You retire at age 60 and expect to live another 23 years. On the day you retire, you have \$568,900 in your retirement savings account. You are conservative and expect to earn 5.2% on your money during your retirement. How much can you withdraw from your retirement savings each month if you plan to die on the day you spend your last penny? i. (10 pts) Write down the discounted cash flow equation.

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• Spring '16
• Islam Rizvanoghlu

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