Time value of money
1) City of suburbia is faced with two choices: purchasing a road construction equipment for $66,000, or leasing the equipment for $15,000 per year for a period of 5 years. The city needs equipment only for 5 years. Assume the city faces the current rate of 1% on the lease option. Which option should the city choose? How does your answer changes with varying interest rates? (Try the following what if scenarios: the rate of 5% and the rate -0.1%.)
2) A time-sharing condominium firm offers prizes to people who visit its project and listen to a marketing presentation. One prize is a $1,000 savings account. Unfortunately, the account would not be available for forty-five years and requires that the winner pays an initial service fee of $55. If one puts $55 in an investment account, what annual compound rate of return would cause that sum to reach $1,000 in forty-five years? 2 3) Your friend informed you that a comic book your grandfather purchased for 10 cents in 1948 is worth $85 today. How much in the 2016 dollars did your grandfather paid for the comic book? (Use the Price Indexes for Personal Consumption Expenditures from BEA.) What has been the average annual compound rate of return on that valuable asset? Assuming the current Treasury Bills 1-year rates of 0.58%, how much will the comic be valued in 1 year from now? Three years? If the rate changes to -0.01%?