Alias Jady Santos

2013-11360

HW CE 22 THX

8-2
A = $1,000; N = 10
(a) f = 6% per year; ir = 4% per year
In Part (a), the $1,000 is an A$ uniform cash flow (annuity)
im = 0.04 + 0.06 + (0.04)(0.06) = 0.1024, or 10.24% per year
PW(im) = $1,000 (P/A,10.24%,10) = $1,000(6.0817) = $6,082
(b) In Part (b), the $1,000 is a R$ uniform cash flow (annuity) because the A$ cash flow is
$1,000
(1.06)k where 1 k 10; i.e.,
kb
( R $ ) k=( A $ ) k ( 1 ) =$ 1,000(1.06)k (1/(1+1.06))k0=$ 1,000 = $1,000; 1 k 10
1+f
PW(ir) = $1,000 (P/A,4%,10) = $8,111
8-6
f = 4% per year; ir = 8% per year; b = 0
Alternative A: Estimates are in actual dollars, so the combined (market) interest rate must be
used to
compute the present worth (PW).
im = ir + f + (ir)(f) = 0.08 + 0.04 + (0.08)(0.04) = 0.1232 or 12.32% per year
PW(12.32%)=$120,000(P/F,12.32%,1)$132,000(P/F,12.32%,2)
$148,000(P/F,12.32%,3)$160,000(P/F,12.32%,4)
=$120,000(0.8903)$132,000(0.7927)$148,000(0.7057)$160,000(0.6283)
=$416,444
Alternative B: Estimates are in real dollars, so the real interest rate must be used to compute the
present
worth (PW).
PW(8%)=$100,000(P/A,8%,4)$10,000(P/G,8%,4)
=$100,000(3.3121)$10,000(4.65)
=$284,710
Alternative B has the least negative equivalent worth in the base time period (a PW value in this
case since b = 0).