Homework Answers
Real rate of interest=(1+nominal rate)/(1+inflation rate)-1=1.13/1.06-1=6.60377%
We see that the present equivalent worth of the investment is given as equal to=-10000+3000/r*(1-1/(1+r)^5)=-10000+3000/6.60377%*(1-1/(1+6.60377%)^5)=2432.200804
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A $10,000 investment would return a series of $3,000 year-end payments over the next 5 years...
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PROBLEM A $10,000 investment would return a series of $3,000 year-end payments over the next 5 years if no inflation were present. However, an average inflation rate of 6 percent is expected to increase the payments accordingly. If the annual market rate of interest remains at 13 percent, determine the present equivalent worth of the investment
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