solution to problem set 3

solution to problem set 3 - Solution to Problem Set 3 Prof....

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1 Solution to Problem Set 3 Prof. H. Wang © copyright 2008
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2 How Long is the Wait? If we deposit $5,000 today in an account paying 10%, how long does it take to grow to $10,000? T r C FV ) 1 ( 0 + × = T ) 10 . 1 ( 000 , 5 $ 000 , 10 $ × = 2 000 , 5 $ 000 , 10 $ ) 10 . 1 ( = = T 2 ln ) 10 . 1 ln( = T years 27 . 7 0953 . 0 6931 . 0 ) 10 . 1 ln( 2 ln = = = T
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3 Assume the total cost of a college education will be $50,000 when your child enters college in 12 years. You have $5,000 to invest today. What rate of interest must you earn on your investment to cover the cost of your child’s education? What Rate Is Enough? T r C FV ) 1 ( 0 + × = 12 ) 1 ( 000 , 5 $ 000 , 50 $ r + × = 10 000 , 5 $ 000 , 50 $ ) 1 ( 12 = = + r 12 1 10 ) 1 ( = + r 2115 . 1 2115 . 1 1 10 12 1 = = = r
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4 Special Cases of Cash Flows ± Perpetuity • A constant stream of cash flows that lasts forever. ± Growing perpetuity • A stream of cash flows that grows at a constant rate forever. ± Annuity
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solution to problem set 3 - Solution to Problem Set 3 Prof....

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