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ACCOUNTING AND FINANCIAL ENGINEERING - EXAMPLE 34.13 (CORRECTION) : (i) In the Present Value Multiplication Rule, let PV = present value, Ra = interest rate for first discount, A = duration for first discount; Rc = interest rate for second discount, C = duration for second discount. Let PV = [ 1 / (1 + Ra) ^ A ] [ 1 / (1 + Rc) ^ C ] where ^ is the symbol of power : 3 ^ 2 = 3 x 3, 2 ^ 3 = 2 x 2 x 2. (a) For discounts involving 8 % / year for 3 years and 10 % / year for 9 years, find the value of PV. (b) If Re = interest rate for third discount, E = duration of third discount, form a mathematical equation of PV as a function of A, C, E, Ra, Rc, Re. Note : Discounts are available in the purchase of certain biochemical engineering instruments. (ii) Let R = nominal interest rate related to growth rate of money, r = real interest rate related to growth rate of purchase power. If I = inflation, where the unit of R, r and I is %, find the mathematical relationship of r as a function of R and I.
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Answer Posted / kangchuentat
ACCOUNTING AND FINANCIAL ENGINEERING - ANSWER 34.13 (CORRECTION) : (i) (a) Let Ra = 0.08, A = 3; Rc = 0.1, C = 9. Then PV = [ 1 / (1 + Ra) ^ A ] [ 1 / (1 + Rc) ^ C ] = [ 1 / (1 + 0.08) ^ 3 ] [ 1 / (1 + 0.1) ^ 9 ] = 0.33666. (b) PV = [ 1 / (1 + Ra) ^ A ] [ 1 / (1 + Rc) ^ C ] [ 1 / (1 + Re) ^ E ]. (ii) r = R - I. The answer is given by Kang Chuen Tat; PO Box 6263, Dandenong, Victoria VIC 3175, Australia; SMS +61405421706; chuentat@hotmail.com; http://kangchuentat.wordpress.com.
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