8.

6/
f = 6% per year; ir = 9% per year; b = 0
Alternative A:
Estimates are in actual dollars, so the combined (market) interest rate must be used to
compute the present worth (PW).
i m = i r) + f + (i r))(f) = 0.09 + 0.06 + (0.09)(0.06) = 0.1554 or 15.54% per year

PW (15.54%) = − $120,000(P/F,15.54%,1) − $132,000(P/F,15.54%,2) −

$148,000(P/F,15.54%,3) − $160,000(P/F,15.54%,4)
= − $120,000(0.8655) − $132,000(0.7491) − $148,000(0.6483) − $160,000(0.5611)
= − $388,466
Alternative B:
Estimates are in real dollars, so the real interest rate must be used to compute the present
worth (PW).
PW (9%) = − $100,000(P/A,9%,4) − $10,000(P/G,9%,4)
= − $100,000(3.2397) − $10,000(4.511)
= − $369,080
Alternative B has the least negative equivalent worth in the base time period (a PW value in this
case since b = 0).
8.7/
(a) $6.58 = $50(P/F, i′, 50), or i′ = −3.97% (annual average loss in purchasing power)
(b) $1,952 = $50(F/P, i*, 50), or i* = 7.6% (which is the market interest rate). The real rate
earned on the investment in stocks is (7.6% − 3.97%)/1.0397 = 3.5%