Problem 1. Your Uncle Joe has just died and left $10,000 payable to you when you turn 30 years old. You are now 20. Currently, the annual rate of interest on can obtain by buying 10-year bonds is 6.5 percent. Your brother offers you $6,000 cash right now to sign over your inheritance. Should you do it? No he should not do it be because if he waits 10 more years, he will get more money.
Problem 2. Calculate the present value of the income streams A to E in Table at an 8 percent interest rate and again at 10 percent rate.
Suppose that the investment behind the flow of income in E is a machine that cost$1,235 at the beginning of the year 1. Would you buy the machine if the interest rate were 8 percent? If the interest rate were 10 percent?
TABLE:
End of Year A B C D E
1 $80 $80 $100 $100 $500
2 80 80 100 100 300
3 80 80 1,100 100 400
4 80 80 0 100 300
5 1,080 80 0 100 0
6 0 80 0 1,100 0
7 0 1,080 0 0 0