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are171a-homework-2 - Finance Homework 2 A RE 171A Winter...

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ARE 171A Finance Homework 2 Winter 2010 A. Havenner Ten problems on two pages. Please show your setup equations explicitly, and box your answers. State your interest rate answers with four significant digits (e.g., .01234 for 1.234%), and your dollars answers in dollars and cents (e.g., \$1,000,000.43 for a million dollars and 43 cents); carry five nonzero digits in your calculations using small magnitudes. [6] 1. What is the future value of \$1,000 continuously compounded for six years and three months at a stated annual rate of 8%? [10] 2. You must decide whether or not to purchase new capital equipment. The cost of the new machine is \$5,000. The appropriate discount rate is 10%. The equipment will produce cash flows of \$700 at the end of year 1; \$900 at the end of year 2; \$1.000 at the end of each of years 3, 4, 5, and 6; \$1,250 at the end of year 7; and \$1,375 at the end of year 8. Should you buy the machine? 3. Maria wants to put \$500,000 down seven years from now on a vineyard high in the mountains of Chile. She has found an account that pays a stated annual rate of 5% interest com- pounded monthly into which she plans to make deposits beginning 30 days from now and continuing every month for seven years. What must she deposit monthly?

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are171a-homework-2 - Finance Homework 2 A RE 171A Winter...

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