Economic Decisions Answers

P1

a.This is an investment situation because the cash goes out before it comes in.
b. NPV = -2000 + 1000(P/A, i, 5) - 200(P/G, i, 5)
c. For i = .20
NPV = -2000 + 1000*2.9906 - 200*4.9061= -2000 + 2990.6 - 981.22 = 9.38
Since NPV > 0, the investment is acceptable.
d. At 0% interest, the present worth of the investment is the sum of the cash flows. The annual worth is the present worth divided by 5.
The sum of the cash flows is -2000 + 1000 + 800 + 600 + 400 + 200 = 1000
The net annual worth is 1000/5 = 200 per year.

P2a

NPW = -1500 + 900(P/A, i, 4)(P/F, i ,3) = -151.7, Reject

P2b

NPW = -1500 + 900(A/F, i, 2)(P/A, i ,8)=69.7, Accept

 

P2c

NPW = -1500 + 900(P/A, i, inf.)(P/F, i 6)=7.04, Accept

 

P3

You should pay the present worth of the future payments.
PW = 150(P/A, 0.0175, 12) = 150*10.740 = 1611.

The remaining money is 20000 - 1611 = 18389
Invested at 1.75%% interest per month, this money will grow to
18389*(F/P, 0.0175, 12) = 18389*1.231 = 22636.859
Note that this is enough to make the same deal with your room-mate and have some left over.