Question

_{9 An investor wants a real rate of return i' of 10% per year. If the expected annual inflation rate for the next several years is 3.5%, what interest rate i should be used in project analysis calculations? 10 Inflation has been a reality for the general economy of the U.S. in many years. Given this assumption. Calculate, the number of years it will take for the purchasing power of today's dollars to equal one-third of their present value. Assume that inflation will average 3.5% per year. 11 Sally Johnson loaned a friend $20,000 at 15% interest, compounded annually. The loan will be paid in four equal end-of-year payments. Sally expects the inflation rate to be 4%. After taking inflation into account, what rate of return is Sally receiving on the loan? Compute your answer to the nearest 0.1 %. 12 A man wishes to set aside some money for his daughter's college education. His goal is to have a bank savings account containing an amount equivalent $20,000 in today's dollars at the girl's 18th birthday: The estimated inflation rate is 8%. If the bank pays 5% compounded annually, what lump sum should be deposit today on the child's 4th birthday?}

Answer 1

Due to presence of HOMEWORKLIB POLICY, I am answering one question.

9.

Ans:

Return from investment = 10%

Expected inflation rate = 3.5%

Effective inflation adjusted interest rate that should be used in project analysis is given as:

$i=\frac{1+0.10}{1+0.035}-1=0.0628$

or 6.28 %.

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