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Problem_Set_1_solution

# Problem_Set_1_solution - Problem set 1 solution zhipeng Yan...

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Problem set 1 – solution zhipeng Yan Problem Set 1: Present Value Solution 1. (a) The PV of the project is 10 1 17000 (1 14%) t t = + = ) ) 14 . 0 1 ( 1 1 ( 14 . 0 17000 10 + (use annuity formula ) = \$886, 739.66 (b) At the end of 5 years, there will be 5 more years of income from the project, Therefore it will be worth = + 5 1 ) 14 . 0 1 ( 170000 t t = \$583, 623.76 (This is the PV at the end of 5 th year, if you want to get PV now, you have to discount it again ) 2. An annuity of \$1 over the next 12 years is worth 12 1 1 [1 ] 8% (1 8%) + = \$7.536 Therefore, Basset can buy 20,000/7.536 = 2653.90 units of \$1 annuity and receive \$2563.90 every year. Or, equivalently, you can use the annuity formula directly: Solve 12 1 [1 ] 20,000 8% (1 8%) x = + Get x = 2653.9. In Excel, you should use function PMT(rate, Nper, Pv), where rate = 8%, Number of periods = 12, and PV = 20,000. However, since you cannot use Excel in the exams, you’d better learn how to use formulas I gave you. 3. Value of this year’s production = \$14*100,000 = \$1,400,000 The growth rate of income= 1.02* 0.96 1 = 2.080% Using the annuity with growth formula, the PV of the oil well is = 18 1,400,000*(1 2.08%) 1 2.08%

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Problem_Set_1_solution - Problem set 1 solution zhipeng Yan...

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