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Unformatted text preview: 1 Solution to Problem Set 3 Prof. H. Wang copyright 2011 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 ( + = 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 . 6931 . ) 10 . 1 ln( 2 ln = = = T 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 childs education? What Rate Is Enough? T r C FV ) 1 ( + = 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 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....
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 Spring '08
 STAFF

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