Homework Answers
1) There will be a decrease in future consumption by 20%
FV of F0 after 1 year
1000 * 1.10 = 11000
F1 = 15000
If the 20% decrease is in F1
15000 * ( 1 - 0.2 ) = 12000
12000 + 11000 = 23000
23000 / 2 = 11500
Total = 15000 + 11000
= 26000
If the 20% decrease is in total
26000 * ( 1- 0.2 ) = 20800
20800 / 2 = 10400
2) if the intrrest rate is 6% and 12%
| Interest rate | ||||
| 10% | 6% | 14% | ||
| F0 | 10000 | 11000 | 11660 | 13292.40 |
| F1 | 15000 | 15000 | 15000 | 15000 |
| 20% decrease in F1 | 12000 | 12000 | 12000 | |
| Total | 23000 | 23660 | 25292.4 | |
| Smoothing Out | 11500 | 11830 | 12646.2 | |
| Total | 26000 | 26660 | 28292.4 | |
| 20% decrease in Total | 20800 | 21328 | 22633.92 | |
| Smoothing Out | 10400 | 10664 | 11316.96 |
In any case, the scenario of a higher interest rate or a 14%
interest rate is more advantageous.
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