410 resource economics

410 resource economics - (1) or $50,000 per year forever....

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Suppose you are thinking of buying a new car. The dealer offers to loan you $20,000 in exchange  for a payment of $5,000 at the end of each of the next five years. What is the present value of the  loan if the interest rate is 7%? Imagine that you stumble across a winning lottery ticket whose prize is a million dollars.  Your first reaction, no doubt, would be to ask how the prize money will be paid out so  that you could compute its present value. 1. Suppose it is to be paid out in 10 installments of $100,000 each. If the interest  rate is 5%, what is the present value of the prize? 2. Now suppose the lottery commission offers you a choice: the 10 payments in part 
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Unformatted text preview: (1) or $50,000 per year forever. Which is better in terms of present value? 3. What if the stream of payments in part (2) only lasted 30 years instead of forever. What has the highest present value then? Hint: there is an easier way to solve this problem than adding up the present values of 30 payments one at a time Suppose a car costs $20,000 in period 0, requires $1,000 of fuel in each of years 1-5 and is sold at the end of year 5 for $12,000. If the interest rate is 5%, what is the net present value of owning and driving the car?...
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