Homework 6 Solution

Homework 6 Solution - Homework 6 Solution 2.53 Clydes...

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Homework 6 Solution 2.53 Clyde’s parents paid $50,000 per year in Years 8 through 10 to increase his height by 3 inches. So the hormone treatments can be represented by a 3-year-long uniform series. If we let X be the extra amount per year that Clyde would make if he were taller, then Clyde’s increased earnings can be represented by a 35-year-long uniform series in Years 26 through 60. To justify the cost of the hormones, the increased earnings must be worth at least as much as the hormone treatments are worth. Because the two cash flow series occur over different time periods and money has a time value, we have to calculate the equivalent worth of the two series at a common point in time in order to compare them. The common point in time is completely arbitrary. We could choose Time 0 (the day Clyde was born): The equivalent worth of the hormone treatments at the end of Year 0 can be calculated by taking the present worth of the cash flows at the end of Year 7 (using P|A) and discounting that value by 7 years: 
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Homework 6 Solution - Homework 6 Solution 2.53 Clydes...

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