Economic Equivalence

1. Your rich Grandfather has offered you a choice of one of the

three following alternatives: $10,000.00 now; $2,000 a year
for eight years; or $24,000 at the end of eight years, assuming
you could earn 11 percent annually, which alternative should
you choose
2. In 2010, the National Highway Traffic safety Administration
raised the average fuel efficiency standard to 35.5 miles per
gallon for cars and light trucks by the year 2016. The rules will
cost consumers an average of $926 extra per vehicle in the
2016 model year. Assume Ali will purchase a new car in 2016
and plans to keep it for 5 years. How much will the monthly
savings in the cost of gasoline have to be to recover Alis extra
cost? Use an interest rate of 0.75% per month

Economic Equivalence
Mr. Usman wishes to save money to provide for his retirement.
Beginning one year from now, he will begin depositing the same
fixed amount each year for the next 30 years into a retirement
savings account. Starting one year after making his final deposit,
he will withdraw $100,000 annually for each of the following 25
years (i.e. he will make 25 withdrawals in all). Assume that the
retirement fund earns 12% annually over both the period that he
is depositing money and the period he makes withdrawals. In
order for Usman to have sufficient funds in his account to fund
his retirement, how much should he deposit annually.

Economic Equivalence
Ron Jamison, a 20-year-old college student, consumes
about a carton of cigarettes a week. He wonders how much
money he could accumulate by age 65 if he quit smoking
now and put his cigarette money into a savings account.
Cigarettes cost $35 per carton. Ron expects that a savings
account would earn 5% interest, compounded
semiannually. Compute Ron's future worth at age 65.
Finding Bond Prices Using the General Formula:
Find the value of a note with a remaining term of three
years, a face value of $10,000 and a coupon of $500 per
year. Assume the market yield is 4%.

Economic Equivalence
Mr. Ahsan plans to retire 33 years from now. He expects that he
will live 27 years after retiring. He want to have enough money
upon reaching retirement age to withdraw Rs.180,000 at the
end of each year from his account after retirement and yet still
have Rs.2,500,000 left in the account at the time of his expected
death. He plans to accumulate the retirement fund by making
equal annual deposits at the end of each year for the next 33
years. He expects to earn 12% per year on your deposits.
However, he only expects to earn 6% per year on his investment
after he retires since he will choose to place the money in less
risky investments. What equal annual deposits must he make
each year to reach his retirement goal?
2500 K

180 K 180 K 180 K

1
A

2
A

33 1

4...........................
A

12%

180 K

4...................................

6%

27