EC 314: Public and Private Investment Fall 2012 Q2: Time Value #1

PASS Name:

NO PASS

(F |P, i, N ) (P |A, i, N ) (P |G, i, N ) (P |A1 , g, i, N )

F = P (1 + i)N P =A P = P =
(1+i)N 1 i(1+i)N (1+i)N iN 1 G i2 (1+i)N 1(1+g)N (1+i)N A1 ig

or P = A1

N 1+i

if : i = g Not Factor Note

Consider the following cash ow diagram.

60 50

66

Cash Flow

40 30 20 10 0

34 18 3
0

4
1

6
2

10
3 4 5 6

Period
O By 1. Write an equation, in factor notation, that describes the present worth of this cash One

ow sequence.

2. Write an equivelent equation in factor notation, i.e., decompose the cash ow dierently.

3. Calculate the present worth of this series when the interest rate is 10.00%?

Answer Key
1. Answer: One of many possible answers is: P = 3(P |A,i,7) + 1(P |A1 , i, g = 100%, 6) (1+i)1 2. Answer: You just need to create another variation 3. Answer: The present worth is 89.77