Results 1 to 2 of 2

Math Help - working out if an investment is economic. (question inside)

  1. #1
    Newbie
    Joined
    Aug 2007
    Posts
    4

    working out if an investment is economic. (question inside)

    if an investment returned $1000 every year for the first 4 years and returned $1200 yearly after that for 5 years. which after the return becamse $2000 forever. The investment requires three instalments of the same size; immediately, in two years time and five years time. the interest rate is constant and 10%
    What is the maximum size of instalments before the investment becomes uneconomic?

    Can some one tell me what formulae to use for what part of this question as i am completely stumped. any help GREATLY APPRECIATED.
    Follow Math Help Forum on Facebook and Google+

  2. #2
    Grand Panjandrum
    Joined
    Nov 2005
    From
    someplace
    Posts
    14,972
    Thanks
    4
    Quote Originally Posted by kelly_m View Post
    if an investment returned $1000 every year for the first 4 years and returned $1200 yearly after that for 5 years. which after the return becamse $2000 forever. The investment requires three instalments of the same size; immediately, in two years time and five years time. the interest rate is constant and 10%
    What is the maximum size of instalments before the investment becomes uneconomic?

    Can some one tell me what formulae to use for what part of this question as i am completely stumped. any help GREATLY APPRECIATED.
    Let each installment be X, then present value of the installments:

    <br />
A=X + 1.1^{-2}X + 1.1^{-5}X \approx 2.447~X <br />

    Present value of the payments is:

    <br />
B=1000 ( 1 + 1.1^{-1} + 1.1^{-2} + 1.1^{-3}) + 1200 \times 1.1^{-4} (1+1.1^{-1} + 1.1^{-2}+1.1^{-3}+1.1^{-4})
    ................. + 2000 \times 1.1^{-9} (1 + 1.1^{-1} + 1.1^{-2} +...)<br />

    ... = 1000 \frac{1-1.1^{-4}}{1-1.1^{-1}} + 1200\times 1.1^{-4} \frac{1-1.1^{-5}}{1-1.1^{-1}}+ 2000\times 1.1^{-9} \frac{1}{1-1.1^{-1}}\approx 16234.69<br />

    So the break even point is:

    <br />
X \approx 16234.69/2.447 \approx 6634.53<br />

    RonL
    Follow Math Help Forum on Facebook and Google+

Similar Math Help Forum Discussions

  1. Replies: 2
    Last Post: June 23rd 2010, 08:57 AM
  2. Replies: 1
    Last Post: May 8th 2009, 10:54 PM
  3. Another investment question
    Posted in the Algebra Forum
    Replies: 1
    Last Post: January 13th 2009, 05:45 PM
  4. Replies: 4
    Last Post: April 13th 2008, 07:29 AM
  5. Economic question
    Posted in the Business Math Forum
    Replies: 1
    Last Post: January 18th 2008, 08:55 AM

Search Tags


/mathhelpforum @mathhelpforum