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) An improved design of a computerized piece of continuous quality measuring equipment used to control the thickness of rolled sheet products is...
Based on the E(PW), is the new design preferable to the current unit? (Show a single-stage decision tree diagram for this situation.) What is the EVPI? What does the EVPI tell you?
2.) Your rich aunt is going to give you an end-of-year gift of $1,000 for each of the next 10 years.
a. If general price inflation is expected to average 6% per year during the next 10 years, what is the equivalent value of these gifts at the present time? The real interest rate is 4% per year.
b. Suppose that your aunt specified that the annual gifts of $1,000 are to be increased by 6% each year to keep pace with inflation. With a real interest rate of 4% per year, what is the current PW of the gifts?
3.) Your older brother is concerned more about investment safety than about investment performance. For example, he has invested $100,000 in safe 10-year corporate AAA bonds yielding an average of 6% per year, payable each year. His effective income tax rate is 33%, and inflation will average 3% per year. How much will his $100,000 be worth in 10 years in today’s purchasing power after income taxes and inflation are taken into account?
4.) Twenty years ago your rich uncle invested $10,000 in an aggressive (i.e., risky) mutual fund. Much to your uncle’s chagrin, the value of his investment declined by 18% during the first year and then declined another 31% during the second year. But your uncle decided to stick with this mutual fund, reasoning that long term sustainable growth of the U.S. economy was bound to occur and enhance the value of his mutual fund. Eighteen more years have passed, and your uncle’s cumulative return over the 20-year period is a whopping 507%!
a. What is the value of the original investment now?
b. If inflation has averaged 6% per year over the past 20 years, what is the spending power equivalent of the answer to Part (a) in terms of real dollars 20 years ago?
c. What is the real compound interest rate earned over the 20-year period?
d. During the past 18 years, what compound annual rate of return (yield) was earned on your uncle’s investment?
