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EGM-Q04-soln

# EGM-Q04-soln - Solution Quiz 4 Spring 2008 Note that C = of...

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Solution Quiz # 4 – Spring 2008 Note that C = # of Compounding/payment K = # of Payments/yr, M = Total Compounding/yr The effective interest rate i = (1+ r/M) C -1 (1) The cash flow 1 can be evaluated as P 1 = -10,000 + 5000(P/A,10%,4) = 5850 This must be equivalent to Cash flow 2. Note that the second cash flow is linear gradient type, so that we can find the value of X. P 2 must be equal to 5850 for equivalency = X + 3500(P/A,10%,4)+1000(P/G,10%,4) = X + 15472.75 = 5850 Which X= 9623, or X = withdrawal of 9623 = \$ -9623 Ans: C (2) This problem is to find equivalence of two problems at a known time. Here we will try to evaluate the value of two cash flows on 17 th birthday, which is the end of year 16. Two cash flows must be equivalent. We will try to find the value of deposits (from the end of year 5 to the end of year 16 i.e., from 6 th to17 th birthdays) and withdrawals of \$5000 at the end of year 17, 18, 19, and 20, or from 18 th to 21 st birthdays. The cash flow

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EGM-Q04-soln - Solution Quiz 4 Spring 2008 Note that C = of...

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