on investment of (a) Inflation is running at 4% per year. You wish to obtain a r

Question

on investment of (a) Inflation is running at 4% per year. You wish to obtain a return 8% per year that reflects a true purchasing power increase, what must be the return you need to obnain when combining the infiation and true purchasing power increase? (b) What series of equal annual payments is equivalent to a series of decreasing payments as follows 5,000, 54 000, 53,000.2 ,000.51 000 if the interest rate is 10 percent per year? ( a)53000 (b) S300I+0.1) 53,300 (c ) 155/XXXF IP IOSA, + $4 000(F IP 10%,3) +51,000(HP 10%,2) + S2.000(F i P 105.0 (d)S5000(ALF, 10% 5) . SI 100AIG 10% 5)

Explanation / Answer

6)
Real Rate of Return (r) = 8%
Inflation Rate (K) = 4%
Nominal rate of interest = ((1+ r) x (1+k))-1
= ((1+ 8%)x (1+ 4%)) - 1 = 12.32%

7) Option C is correct

Year Cash Flow F/P 10% 4 5000 1.464 7320 3 4000 1.331 5324 2 3000 1.21 3630 1 2000 1.1 2200 0 1000 1 1000 19474 PMT = $19474/5 3894.8

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