Question
6) You would like to have $30000 (in real $) in an account 50 years from now. If the annual inflation rate is expected to
6) You would like to have $30000 (in real $) in an account 50 years from now. If the annual inflation rate is expected to be 2.4%, and you expect a nominal annual return of 7% on the account, how much would you need to put in today?
7) You buy a car, and take out a loan for $14,000 that has equal nominal annual payments over the next five years. The real rate of return on the loan is 4.3%, and the annual inflation rate is 2.6%. What will the payments be?
8) You have $2500 in an account that yields a nominal return of 7%. If the inflation rate is 3%, how long will you have to leave your money in the account for it to double in real terms?
9) A project costs $3000 immediately. The project yields nominal returns of $100 in year 1, $200 in year 2, $300 in year 3, $400 in year 4, and $500 in year 5. In addition, the project will have capital worth $2500 (in nominal $) left over in year 5. The real discount rate is 7% and the expected inflation rate is 3%. What is the NPV of this project?
10)You have $2000 to invest, and are choosing between two projects, both of which cost $2000 up front and will yield six years of returns. The returns for the first investment will be paid in nominal $, starting at $400 a year from now and increasing at 8% annually. The returns for the second will be paid in real $, starting at $500 and increasing at 2% annually. If your real hurdle rate is 4.5% and the expected inflation rate is 3.1%, which of these investments should you choose (if any)?
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