HW3Notes - ( 1+ g 1+ r ) and simplify. Ch. 6 #3 In the...

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Homework 3 Notes Ch. 6 #1 My recommendation is to do part c in excel. a column of PV Costs in small increments of r (e.g. r = 0 : 03 ; r = 0 : 031 ; r = 0 : 032 ; etc.). c . Ch. 6 #2 In the second line, change the number 10,000,000 to 2,000,000 . Here±s a big hint for part c: into our present value formula. place: For a number x 1 , we have P T t =1 x t = x x T +1 1 x (you can take my word for it). If we plug in the discount factor 1 1+ r , then we get P T t =1 ( 1 1+ r ) t = ( 1 1+ r ) ( 1 1+ r ) T +1 1 ( 1 1+ r ) = 1 r [1 ± ( 1 1+ r ) t ] after simplifying. This is the formula that you have from lecture. g % multiplied by (1 + g ) (1 + g ) 2 t get multiplied by (1 + g ) t . P T t =1 ( 1+ g 1+ r ) t . Using the formula
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Unformatted text preview: ( 1+ g 1+ r ) and simplify. Ch. 6 #3 In the second paragraph of the problem, it says that the cost is $100 to install. Change this number to $130 . Now, how to use hyperbolic discounting: The problem gives us a discount rate in the form & (1+ t ) where & = 0 : 05 . The point of this is that if & = 0 : 05 is the market discount rate, then with hyperbolic discounting the discount rate is decreasing each period - i.e. its no longer constant. However, we dont need the discount rates to solve the problem. In part a, we want to calculate the discount factors for each period. The hyperbolic discount factor in period t is 1 (1+ t ) & and again & = 0 : 05 . For example, in part b the discounted bene&ts in year 3 are 1 (1+3) & (30) . Now, just add up all the discounted bene&ts to get the PV Bene&ts. 1...
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This note was uploaded on 04/02/2010 for the course ECON Econ 115 taught by Professor Kolstad during the Spring '10 term at UCSB.

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