HW#3 ‫ طارق البحري‬.‫د‬ April 2015 1. Calculate the average annual rate of inflation based on the CPI from the end of 1967 through 1985. Answer: 6.72% .‫اإلحسان يَ ُحطُ من قدر من يتَلَّقونه‬ HW#3 ‫ طارق البحري‬.‫د‬ April 2015 2. Utilizing the data in Table 2, which express the purchasing power of the dollar in various year, compute the inflation rate based on consumer prices for 1952. Answer: 2.15% ‫ إذا أردت أن يحبك‬:‫خالصة الكالم‬ .‫ ازهد فيما بين أيديهم‬،‫الناس‬ HW#3 ‫ طارق البحري‬.‫د‬ April 2015 3. Find the average annual inflation rate from data in Table 2 that show the purchasing power of the dollar in terms of consumer prices for the period from the end of 1986 through 1997. Answer: 3.54% ‫تستح من إعطاء القليل‬ ‫ال‬ ِ .‫فإن الحرمان أقل منه‬ HW#3 ‫ طارق البحري‬.‫د‬ April 2015 4. A person desires to receive an amount in actual dollars 25 years from the present that has the purchasing power at time 5 that $25,000 has at present. If the annual inflation rate is 10% find this actual-dollar amount. Answer: $18,385 ‫إذا لم تزد على الحياة‬ .‫شيئا فأنت زائ ٌد عليها‬ HW#3 ‫ طارق البحري‬.‫د‬ April 2015 5. An individual is scheduled to receive a $40,000 distribution from a trust fund 8 years from the present. The inflation rate is expected to average 6% per year over that time. Find the constant-dollar equivalent to this payment if the constant-dollar base is: a. (the present). b. (4 years after the present). c. (7 years prior to the present). Answer: $16,691 ‫إما نختار أن نحيا حياتنا أو نترك‬ .‫غيرنا يحياها نيابة عنا‬ HW#3 ‫ طارق البحري‬.‫د‬ April 2015 6. The operating cost (from consumption of electricity) of a refrigeration storage unit was $14,000 last year. Since the unit operates continuously, its power consumption is expected to remain the same in the future. If the cost of electrical power is predicted to increase at the rate of 8% annually, find the actual-dollar cash flow representing the operating costs of this unit over the next 5 years. ‫نسيان غاية المرء هو أكثر‬ .‫أشكال الغباء انتشارا‬ HW#3 ‫ طارق البحري‬.‫د‬ April 2015 7. An annuity ( ‫ )مبالغ ناية‬provides for 10 consecutive end-of-year payments of $10,000, beginning one year from the present. The inflation rate for the next 10 years is estimated to be 12% compounded annually. If the inflationfree rate is 7% compounded annually, what is this annuity worth in terms of a single equivalent amount of present-day dollars? Calculate using: a. Actual-dollar analysis. b. Constant-dollar analysis. ‫يتم إنجاز األعمال في موعدها‬ .‫الصحيح في المفكرة فقط‬ HW#3 ‫ طارق البحري‬.‫د‬ April 2015 8. The purchase of a home requires a couple to borrow $210,000 at 7% per year compounded monthly. The loan is to be repaid in equal monthly payments over 30 years. The average monthly inflation rate is expected to be 0.4%. a. What equal monthly payments in terms of constant dollars over the next 30 years is equivalent to the series of actual payments to be made over the life of the loan? b. If this were a no-interest loan to be repaid in equal monthly payments over 30 years, what would be the monthly payments in actual dollars? c. If the inflation rate exceeded the borrowing rate (say, f=10% per year compounded monthly), find the answer to (a). Compare this result to that of (b). ‫ الخطوة األولى‬،‫بُعد المسافة ال يهم‬ .‫فقط هي األكثر صعوبة‬ HW#3 ‫ طارق البحري‬.‫د‬ April 2015 9. A firm has an option to purchase 4 years from now a parcel of land that presently is priced at $250,000. The option states that the price at that time will be adjusted for inflation, assuming inflation at the rate of 5% per year. The firm had net earnings last year of $1,000,000, which are assumed to have occurred at the present. The firm’s earnings are expected to increase at the rate of 20% per year, and the rate at which they can be invested is 12% compounded annually. What fixed percentage of net earning must be saved at the end of each next 4 years so that the land can be purchased 4 years from now? ‫ الخطوة األولى‬،‫بُعد المسافة ال يهم‬ .‫فقط هي األكثر صعوبة‬ HW#3 ‫ طارق البحري‬.‫د‬ April 2015 10. An individual is considering an investment in a retirement fund that earns 14% per year compounded semiannually. He has just celebrated his 40th birthday and he is planning to retire on his 65th. By making equal semiannual deposits of $2,000 up to and including his 65th birthday, what equal annual withdrawals in actual dollars could be made beginning on his 65th birthday, the last withdrawal occurring on his 75th birthday? If the annual inflation rate is 10% compounded semiannually, find the constantdollar equal-annual series over the same 11 years that is equivalent to these withdrawals. (Constant-dollar base, 40th birthday.) Answer: $132,898; $7,727. ‫الحاجة الملحة هو نقطة‬ .‫بداية كل اإلنجازات‬ HW#3 ‫ طارق البحري‬.‫د‬ April 2015 11. A family borrowed $100,000 and purchased a home 20 years ago. The loan was for 30 years at 7% compounded annually. The savings and loan association where the money was obtained is now offering the following deal. A borrower can pay off a loan now by paying only 85% of the remaining balance. It is anticipated that the average market rate of interest will be 12% over the next 10 years. (Assume that payments on the loan are made annually and the 20th payment has just been made). Determine whether the borrower should pay the loan off immediately. The inflation rate is 10% annually. ‫الرغبة الواهنة ال ينتج‬ .‫عنها إنجازات عظيمة‬