Suppose your talent is Y0 = $10 today and Y1 = $0 and your benefit business is U (C0, C1) = √
1. You enjoy arrival to an bombardment opening that concedes you to endue an total I at occasion 0, which succeed increase
to an total f(I) in a year: f(I) = 60I
. Determine the optimal bombardment roll and the optimal lessening
2. No origination opening is beneficial. However, financial markets stop, and borrowing and lending are beneficial
at the admonish of r = 20% per year. What is your affluence in today’s dollars? Determine the optimal lessening scheme.
3. Both the bombardment opening from disunite 1 and the consummate markets from disunite 2 stop. Determine the optimal
bombardment roll and the optimal lessening scheme. What is your affluence in today’s dollars behind you made the
investment? What is the NPV of the bombardment?
Lecture 3 Problem
Today is 1/1/2010. During the contiguous 20 years you succeed be powerful to secure $5,000 whole two years, commencement today (i.e.,
the primary protection into your warys statement is today, then on 1/1/2012, and the decisive one is on 1/1/2030). Behind 20
years you’ll enjoy a cheerful plenty job that succeed concede you to set-on-foot wary $5,000 annually and increase this total by 5%
a year for 10 years (i.e., you’ll secure $5,000 on 1/1/2031, and succeed increase it at 5% a year therebehind until 1/1/2040). You
succeed repair on 1/1/2040 equitpotent behind you execute the decisive protection into your warys statement. Suppose that the interest
admonish is 9.76177% compounded semi-annually.
1. What is the appreciate of your repairment statement when you repair?
2. You neglect to take-back a urban total out of your repairment statement whole month for the contiguous 20 years, delay the
primary take-backal a month behind your repairment (i.e., on 2/1/2040). How ample can you give to take-back?
3. Suppose instead that you neglect to take-back $6,000 whole month forever, delay the primary take-backal a month behind
your repairment (i.e., on 2/1/2040). What potent annual admonish do you demand to deserve behind you repair to be powerful to
give such enduring take-backa