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Instruction: Clearly present the cash flow diagram(s), equivalency model(s), assumptions made and detailed calculations for each...

Instruction: Clearly present the cash flow diagram(s), equivalency model(s), assumptions made and detailed calculations for each problem as applicable.

Question. A series of six real dollar payments are made. The first payment made at the end of the first year is for $12,000 and each subsequent payment increases at the rate of 5% per year. If the inflation rate has averaged 3% and the market interest rate is 12%, determine the present of the series.

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Answer #1

Answers –

The interest rate in real terms so that real interest rate is 12 - 3 = 9%.

We have first payment at the end of first year so there is no interest charged. Find the present value of each annual payment using A/ (1 + r) ^n. In the end, add all the values to get the present worth PW

Time

The Cash flows

The Present value

0

-12000

-12000

1

-12600

-13734

-2

-13230

-15718.6

3

-13891.5

-17989.9

4

-14586.1

-20589.4

5

-15315.4

-23564.6

6

-16081.1

-26969.7

PW

-130566
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