Question

1) A company has two investment possibilities, with the following cash inflows: Investment Year 1 Year 2 Year 3 A $1,400 1,600 1,800 B $1,300 1,300 1,300 If the firm can earn 7 percent in other investments, what is the present value of investments A and B? Use Appendix B and Appendix D to answer the question. Round your answers to the nearest dollar. PV(Investment A): $ PV(Investment B): $ If each investment costs $4,000, is the present value of each investment greater than the cost of the investment? The present value of investment A is the cost. The present value of investment B is the cost.

9)

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Problem 7-09

Inflation is a general increase in prices and may be measured by the Consumer Price Index (CPI). Use Appendix A to answer the questions.

1. In Year 1 the CPI was 100; 30 years later, it was 230. What was the annual rate of inflation? Round your answer to the nearest whole number.
     %

2. Nancy and Pam both currently earn $100,000. If the annual rate of inflation is 4 percent, how much must each earn after eight years to maintain their purchasing power? Round your answer to the nearest dollar.
   $  

3. Your parents bought a home for $50,000 in Year 1 and sold it in Year 31 for $280,000. What was the annual rate of price increase over the 30 years? Round your answer to the nearest whole number.

10)

Tuition costs at various colleges vary from $15,000 to $30,000 annually. These tuitions are expected to increase over time. If the annual rate of increase is 2 percent, what will be the new range in tuition costs in twelve years? Use Appendix A to answer the questions. Round your answers to the nearest dollar.
The range at 2 percent is $   - $   .

If the rate doubles from 2 to 4 percent, what will be the range in tuition costs after twelve years? Use Appendix A to answer the questions. Round your answers to the nearest dollar.
The range at 4 percent is $   - $   .

Answer 1

1.

Value of Investment A = 1400/(1.07) + 1600/(1.07)² + 1800/(1.07)³

Value of Investment A = $4,175.25

Value of Investment B = 1300/(1.07) + 1300/(1.07)² + 1300/(1.07)³

Value of Investment B = $3,411.61

If Cost is $4000

Value of Investment A = $175.25

Value of Investment B = -$588.39

9.a.

FV = PV(1+r)^t

230 = 100(1+r)³⁰

r = 2.82%

9.b.

Amount to be earned after 8 years at 4% inflation rate,

FV = 100000(1.04)⁸

Amount to be earned = $136,856.90

9.c.

FV = PV(1+r)^t

280000 = 50000(1+r)³⁰

r = 5.91%

10.

Range of tuition fee now = 15,000-30,000

After 12 years at 2% interest rate,

Range 1 = 15000(1.02)¹²

Range 1 = $19,024

Range 2 = 30000(1.02)¹²

Range 2 = 38,047

Range is 19024-38047