HW_1_Solutions. University of Michigan IOE
IOE 452
University of Michigan
Assignment I
Fall 2017
Suggested Solutions
Q1–
1. If there was no interest, that is, r = 0, the present value of the cash flows is given by:
PV =
$10; 000
(1 + :000)1 +
$25; 000
(1 + :000)2 +
$15; 000
(1 + :000)3
= $50; 000
In other words, the present value is the sum of the cash flow, or $50; 000. If
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HW_1_Solutions. University of Michigan IOE
IOE 452
University of Michigan
Assignment I
Fall 2017
Suggested Solutions
Q1–
1. If there was no interest, that is, r = 0, the present value of the cash flows is given by:
PV =
$10; 000
(1 + :000)1 +
$25; 000
(1 + :000)2 +
$15; 000
(1 + :000)3
= $50; 000
In other words, the present value is the sum of the cash flow, or $50; 000. If the interest rate is
anything above r = 0%, the present value would be less than $50; 000. The present value cannot be
greater than the sum of cash flows.
The future value of the cash flows in case of no interest, that is, r = 0, is given by
FV = $10; 000 (1 + :000)1 + $25; 000 (1 + :000)2 + $15; 000 (1 + :000)3
= $50; 000
In other words, the future value with interest at r = 0% is $50; 000. If interest is above r0
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