Assume that you drink a $4 latte a day. Over the month the cost is $80 (= $4 5

4). Assume that you choose to forgo your daily latte and instead invest this

amount at the end of each month in an investment fund that earns an interest rate

of 12% p.a. What would the value of your investment be at the end of: (a) 10

years and (b) 50 years? What would these values be if the interest rate were 8%

p.a.? What are the present values of your investments? What is the general

relation between the future and present values calculated? (This is case study 2)

Refer to case study 2 "No Latte for You!" discussed in class (pages 2.20 - 2.24 of your lecture

notes). We made the simplifying assumption that the cost of a latte would not increase over

time. Now assume that you drink a $4 latte a day and over the month the cost is $80. Assume

that the cost of the latte is expected to increase at a rate of 6% per annum, or 0.5% per month

forever. As before, you choose to forgo your daily latte and instead invest this (now growing)

amount at the end of each month in an investment fund that earns an interest rate of 12% p.a.

What is the value of your growing investment at the end of: (a) 10 years and (b) 50 years? What

are the present values of your investments? Show all calculations and round your final answers

to the nearest dollar.