Problem Set for Lecture 10:
1
You are offered to choose between 3 alternatives. Which one would you choose if MARR is
12% and the annual inflation rate is 11%:
a $60,000 now
b $16,000 at the end of each year for 12 years
c $50,000 three years from now and another $80,000 five years from now
2
A woman deposited $1,300 at the end of each year for 6 years, and $2,000 at the end of each
years for the years 7 to 12. How much much does she have in the account after the last deposit
is made, in terms of today’s buying power, if the annual interest rate is 12% and annual inflation
rate is 9%?
3
(takes into consideration what we have learnt also in Lectures 11-12).
4
The following table shows a cost of a market basket for different years. Assuming that year 0 is
the base period, determine the inlation rate for each period and calculate the average inflation
rate over 3 years.
YEAR
COST
0
$504,000
1
$538,400
2
$577,000
3
$629,500
An 8% $20,000 bond with interest
payable quarterly will mature in 13 years. How much should you pay for the bond if you desire
to make a rate of return of a nominal 16% per year compounded quarterly, and the inflation rate
is 2% per quarter?