E120_SU11_HW1Sols - E120 Homework 1 Solutions 1. (a)...

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E120 Homework 1 Solutions 1. (a) Compounded 5 times: 2000 · (1 + 0 . 05) 5 (b) 2000 · (1 + 0 . 05) 10 (c) 2000 · (1 + 0 . 10) 5 (d) Due to compounding. 2. I assume the interest rates given are being compounded annually. (a) 10000 (1+0 . 04) 12 (b) 10000 (1+0 . 08) 20 (c) 10000 (1+0 . 02) 6 3. Assuming interest rate is being compounded annually, we should compare $5000 to $10000 (1+0 . 07) 10 . 4. I assume interest rate is being compounded annually. (a) 3996 · (1 + 0 . 08) 7 (b) 3996 · (1 + 0 . 08) 47 (c) x · (1 + 0 . 08) 18 = 3996, solve for x . 5. First form of payment: PV 1 = 1000 1 . 05 + 1000 1 . 05 2 + 1000 1 . 05 3 = 2723 . 25. Second form of payment: PV 2 = x 1 . 05 3 , where x is payment at the end of the third year. Being indifferent between the two forms implies x 1 . 05 3 = 2723 . 25, so that x = 3152 . 50. 6. Present value of revenue for investment: 4000 1 . 02 + 4000 1 . 02 2 + 4000 1 . 02 3 = 11535 . 53. Present value of cost for investment:
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E120_SU11_HW1Sols - E120 Homework 1 Solutions 1. (a)...

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