Homework 1

# Homework 1 - E60,Fall2007 Homework1Solution 2.4

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E60, Fall 2007 Professor Sam Chiue Homework 1 Solution 2.4 The value of money invested at time 5 for the first option: 23 . 1333 ) 06 . 0 1 ( 1000 5 1 = + = F The value of money invested at time 5 for the second option: 1350 )) 5 ( 07 . 0 1 ( 1000 2 = + = F 1 2 F F so the second option is better. 2.31 98 . 8326 ) 3 %, 12 , | ( 20000 = = P A A Time  (end of  period) Beginning  Balance Interest  Charged Annual  Payment Interest  Payment Principal  Payment Ending  Balance 0 \$20,000.0 0 1 \$20,000.0 0 \$2,400.00 \$8,326.98 \$2,400.00 \$5,926.98 \$14,073.0 2 2 \$14,073.0 2 \$1,688.76 \$8,326.98 \$1,688.76 \$6,638.22 \$7,434.80 3 \$7,434.80 \$892.18 \$8,326.98 \$892.18 \$7,434.80 \$0.00 The amount of interest payment for the second year is 1688.76. 2.56 To solve this problem, we will first convert cash flow series to a five-period equal payment series (first  payment being at the end of period 1 and the last payment at the end of period 5) A 1 =[-50+50(P|G,10%,5)+50(P|A, 10%,5)-50(P|F, 10%, 5)](A|p,10%, 5) = 115.32 C P A C C A 2638 . 1 ) 5 %, 10 , | ( 2 = + = Solving A 1 =A 2  gives C as \$91.25 2.61 This problem is solved using Goal Seek function of Excel. The interest rate that makes these cash flows  equivalent is 14.96%. The following table gives the present value of the cash flows at this interest rate. Time First Cash Flow Present Value Second Cash Flow Present Value 0 0 \$                    - 0 \$                  -

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1 \$              100.00 \$               86.98 \$              200.00 \$            173.97 2 \$              150.00 \$             113.49 \$              150.00 \$            113.49 3 \$              150.00 \$               98.72 \$                50.00
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## This note was uploaded on 02/10/2010 for the course E 60 taught by Professor -1 during the Winter '10 term at Stanford.

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Homework 1 - E60,Fall2007 Homework1Solution 2.4

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