Problem no.

30

A company invests $10,000 today to be repaid in 5 years in one lump sum at 12% compounded annually.
If the rate of inflation is 3% compounded annually, approximately how much profit, in present day
dollars, is realized over the 5 years?

A. $3200 B. $5200 C. $5630 D. $7620

GIVEN:

Present Value = $10,000 i = 12% compounded annually

n = 5yrs inflation rate = 3%

REQUIRED:

Profit in present day dollars over 5 years

CASH FLOW DIAGRAM:

F

0 1 2 3 4 5

SOLUTION:

[ ]
5
1+i r
F=P
1+i fr

[ ]
5
1+ 0.12
¿ 10000
1+ 0.03

F=15,202.11417

Profit=F−P

¿ 15,202.11417−10,000

Profit = $5202.11417

Problem no. 30
A company invests $10,000 today to be repaid in 5 years in one lump sum at 12% compounded annually.
If the rate of inflation is 3% compounded annually, approximately how much profit, in present day
dollars, is realized over the 5 years?

A. $3200 B. $5200 C. $5630 D. $7620

GIVEN:

Present Value = $10,000 i = 12% compounded annually

n = 5yrs inflation rate = 3%

REQUIRED:

Profit in present day dollars over 5 years

CASH FLOW DIAGRAM:

F

0 1 2 3 4 5

SOLUTION:

[ ]
5
1+i r
F=P
1+i fr

[ ]
5
1+ 0.12
¿ 10000
1+ 0.03

F=15,202.11417

Profit=F−P

¿ 15,202.11417−10,000

Profit = $5202.11417