contemporary engineering economics Currently your growing child/growing parents
ID: 1144819 • Letter: C
Question
contemporary engineering economics
Currently your growing child/growing parents subscription will expire with your 24months issue. To renew on an annual basis until your child reaches 72months would cost you a total of $63.84(15.96 per year). We feel it is so important for you to continue receiving this material until the 72nd month that we offer you an opportunity to renew now for $57.12. Not only is this a savings of 10% over the regular rate, but it is excellent inflation hedge for you against increasing rates in the future. Please act now by sending $57.12. a) If your money is worth 6% per year, determine whether this offer can be of any value, b) what rate of interest would make you indifferent between the two renewal options?
Explanation / Answer
The offer is of value. The reason is current value in third year of 15.96=15.96, current value of 15.96 of 4th year in 3rd year=15.96/(1.06)=15.06.current value of 15.96 of 5th year in 3rd year=15.96/(1.06)(1.06)=14.20.similarly current value of 15.96of 6th year in 3rd year =15.96/(1.06)(1.06)(1.06)=13.41.so current value of all these years =15.96+15.06+14.20+13.41=58.36.since under offer price in 3rd year =57.12 only the offer is good
B The answer is 8%.At 8% the current value of 15.96s of 3rd,4th,5th,6th = 15.96+15.96/1.08+15.96/(1.08)(1.08)+15.96/(1.08)(1.08)(1.08)=57.096=approx 57.12
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