ENG106W12_HW4-solution

ENG106W12_HW4-solution - ENG 106 Homework#4 Solutions...

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ENG 106 Homework #4 Solutions Winter 2012 4.7 An annuity provides for 10 consecutive end-of-year payments of \$8,500. The average general inflation rate is estimated to be 5% annually, and the market interest rate is 12% annually. What is the annuity worth in terms of a single equivalent amount of today’s dollars? Today’s dollars = use market interest rate P = A (P/A, ι , N) = 8500 ( P/A, 12 %, 10 ) = 8500 * (5.6502) = \$48,027. 4.10 The purchase of a car requires a \$12,000 loan to be repaid in monthly installments for four years at 12% interest compounded monthly. If the general inflation rate is 6% compounded monthly, find the actual and constant dollar value of the 20 th payment of this loan. N = monthly * 4 years = 48 periods. i = 12% = 1% monthly, f = 6% = .5% monthly, P = 12000 A = P (A/P, interest rate, N), where for actual dollars, A x = A 20 A 20 = 12000 * (A/P, 1%, 48) = 12000 * (.0263) = \$315.60 in actual dollars. A n *[(P/F , inflation rate , n)] = Constant Dollars. = A’ 20 A’ 20 = A 20 *[P/F, .5% , 20)] = \$315.60*.9051 = \$285.65 in constant (year-zero) dollars. #3 Begin with an equal payment series in constant dollars of A’ = \$1000 at the end of each of three years.

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ENG106W12_HW4-solution - ENG 106 Homework#4 Solutions...

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