Assignment 2

Assignment 2 - ActSc 371: Assignment #2 Posted: October 7,...

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ActSc 371: Assignment #2 Posted: October 7, 2005 Due: In class, October 14, 2005 (no electronic submission) Late Assignments Will Not Be Accepted Question 1 Recall Example 2 discussed in class on September 28. We were considering purchasing a machine which costs $1000 today. We will be able to rent this machine out for $75 per year (first rental payment received one year from now) for the next 20 years, and we can borrow and lend at 4%. We found that the net present value of this investment is $19.27 and interpreted this number as “free money,” claiming that we could devise a scheme through which we will receive $19.27 today and have no future obligations (to be more precise, future outflows will be covered by future inflows). The scheme is as follows: Borrow the present value of the rental payments today from Bank A, and use the proceeds to purchase the machine. Bank A will require an annual interest payment (to be paid at the end of every year for the next twenty years) of 4% of the principal (amount borrowed), and the principal must be repaid twenty years from today. At the end of years one through nineteen, use the rental payment
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Assignment 2 - ActSc 371: Assignment #2 Posted: October 7,...

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