# nhw3a - Homework 3 1. Welma wants to buy an elephant but...

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1. Welma wants to buy an elephant but she does not currently have the 14,000 required to buy the type of elephant she wants. A. If she hopes to buy the elephant at this same price in three years, how much does she need to invest in 5% annually compounding T-bills at this moment in time to have enough money in three years? 14000=P(0)*(1+.05)^3 X=12093.72638 B. Assume that in three years elephants now cost \$16,000. If elephants are good representations of current inflationary pressures. What is the effective yearly real rate of return on the T-bills? 16000/14000=(1+i)^3 i=.0455159 1.05/(1+.0455159)= 1.0042888 Real return .0042888 or .42888% C. Calculate how long it will take Welma to afford her elephant if she has the sum of money calculated in part A and inflation and T-bill levels remain constant? This is tricky, you need to setup this equation: 14000=12093.72638*(1+.0042888)^t This is not very easy to solve algebraically, you could keep plugging in values for t until it equals 15000(very sophisticated). Or take logs of both sides:

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## nhw3a - Homework 3 1. Welma wants to buy an elephant but...

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