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Ch10Solutions

# Ch10Solutions - Chapter 10 10.1 The two ways to account for...

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Chapter 10 10.1 The two ways to account for inflation in economic calculations are (1) convert all cash flow amounts into constant-value (CV) dollars, and (2) change the interest rate to include the changing currency values. 10.2 There is no difference between inflated dollars and “then-current” future dollars. 10.3 CV dollars = 100,000/(1 + 0.06) 15 = \$41,727 10.4 Inflated dollars = 10,000(1 + 0.05) 10 = \$16,289 10.5 1.29 = 0.14(1 + f) 57 (1 + f) 57 = 9.214 57[log (1 + f)] = log 9.214 log(1 + f) = 0.01692 f = 3.97% 10.6 Salary in 2015 = 74,400(1 + 0.025) 9 = \$92,915 10.7 Assume C 1 is the cost today. 2*C 1 = C 1 (1 + 0.07) n (1 + 0.07) n = 2.000 n log 1.07 = log 2.000 n = 10.2 years 10.8 Number of future dollars required = 1,500,000(1 + 0.04) 30 = \$4,865,096 10.9 Number of future dollars = present dollars(1 + f) n 9745.51 = 1000(1 + f) 85 log 9.74551 = 85*log(1 + f) 0.9888 = 85*log(1 + f) log(1 + f) = 0.011633 1 + f = 10 0.011633 1 + f = 1.0271 f = 2.71% 10.10 (a) Cost in year 10 = 1000(1.10)(1.10)(1.10)(1.10)(1.10) = \$1610.51 (b) Cost in year 10 at 5% per year = 1000(1 + 0.05) 10 = \$1628.89 The cost is not the same because there are different compound rates on different amounts of money. 10- 1

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10.11 CV dollars = 1,000,000/(1.04) 40 = \$208,289 10.12 The \$1.5 is “then-current dollars”. Use i f to find PW.
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