Question

# a. Suppose you wanted to know in todays value how much money your grandparents earned each...

a. Suppose you wanted to know in todays value how much money your grandparents earned each year. If your grandparents earned \$3000 per year in 1954 and the inflation rate on average is 2%, how much would this \$3000 be worth in 2020?

b. Suppose you have 2 alternative investments. Investment 1 is very safe; you can invest \$1000 at a rate of 2% for the next 10 years. Investment 2 is very risky; you can invest your \$1000 at a rate of 8%; however, there is a 50/50 chance you will receive nothing in the end. Which investment do you chose and why?
c. Suppose you are interested in purchasing an asset that costs \$60,000, but you currently only have \$45,000. If you can earn 6% compounded semi annually, how long will it take until you can afford to purchase the asset?

a . Amount in 2020 = Future value = Present value * ( 1 + interest rate )^ no of years

= 3000 * 1.02^66 = 11084.92

3000 be worth \$11084.92 in 2020 .

b.

Future value of Investment 1 = 1000* 1.02^10 = 1218.99

Future value o investment 2 = 0.5 * 1000*1.08^10 + 0.50*0 = 1079.46

We will chose Investment 2 as it has higher expected future value

c. Future value = Present value * ( 1 + interest rate )^ no of years

60000 = 45000 * ( 1.03 ) ^2n

60000 / 45000 = 1.03^2n

1.33 = 1.03^2n

1.33^0.5 = 1.03^n

1.15 = 1.03^n

Let us use Financial calculator

PV +-45000

FV = 60000

I/ Y = 3

N = ?

CPT< N < 9.73

N of years = 9.73 /2 = 4.87 years