investment HW5 4

QUESTION

A project requires an initial investment of 20,000 dollars. The lifetime of the project will be 13 years with a cashflow stream of 2,000 per year and an interest rate of 3. Compute the Savings/investment ratio.
PV of investment and future earnings of a project is given by : PV = -I a*r (1 r^n)/(1-r) Where, I = initial investment a = annual cash flows r = discount factor = 1/(1 i) (i is rate of interest) For the given project, PV = 20,000

1/1.03)^13)/(1 1/1.03) PV = 1269.91 ($) It is positive and savings = PV = 1269.91 So, savings to investment ratio = 1269.91/20,000 => = 0.0635 i.e. 6.35 % (ANSWER)

ANSWER:

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