Economic Assignments

Assignment Requirements

 

I misread the tables and the tables by using 7% in both the lump sum figure and the annuity while I should just have used 5% in lump sum and 7% in annuity. In short 0.7921 and 5.0757 are wrong.

Question 5b

a)      the amount to raise after 10 years with a $5000 deposit will be given by the formula:

Cost*PVIF_{L, 4yrs +} cost*PVIF_{A, 6yrs,} where L stands for lump sum and A stands for annuity.

4 is the number of years before the cash converts to annuities.

And calculated as follows: $5000*0.7921 + $5000*5.0757=$29,339

Explanation

The question was asking how much one will receive after 10 years, which means it’s the future value. The first 4 years are lump sum and so you read the discount values from the lump sum table. It then changes to annuity meaning you will be receiving equal amounts for the next 6 years annually and so you read the values from the annuity table.

Question 5d

This is a security and its valuation is the same as that of ordinary shares. What I have done is break down the discounted values from year 1 to year 6. Alternatively, one could simply calculate for 6 years give n by the formula

Sales value=payout*PVIF_A where PVIF stands for present value interest factor and thus:

30,000*4.7665=142,995

This formula can be found in business finance books under valuation of securities.

 

 

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