1) (10 points) Consider an economy in which interest rate is 15%. Assume you kno
ID: 1163983 • Letter: 1
Question
1) (10 points) Consider an economy in which interest rate is 15%. Assume you know that price of a new car will be $10000 after 5 years.
a. How much money do you need to deposit in the bank today in order to be able to buy a car in 5 years?
b. If you want to withdraw $500 at the end of every year and still be able to buy a new car in 5 years, how much money do you need to deposit now?
c. What is the present value today of the new car that you will buy after five years?
d. What will be the present value of your future car in exactly two years from now?
Explanation / Answer
a.
How much money do you need to deposit in the bank today in order to be able to buy a car in 5 years
=new car value/(1+r)^T
=10000/(1+15%)^5
=4971.77
b.
how much money do you need to deposit now
=500/(1+15%)^1+500/(1+15%)^2+500/(1+15%)^3+500/(1+15%)^4+500/(1+15%)^5+10000/(1+15%)^5
=6647.84
c.
What is the present value today of the new car that you will buy after five years
=new car value/(1+r)^T
=10000/(1+15%)^5
=4971.77
d.
What will be the present value of your future car in exactly two years from now
=10000/(1+15%)^3=6575.16
the above should be the answer....
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.