Revision as of 18:55, 4 December 2023 by Admin (Created page with "Use growing annuity formula assuming that the payments are made at the begining of each year and you pay in full for the year that you die (unfortunately). The value if you have an expected life of T years is: <math display = "block">\begin{aligned} P V & = 750+ 750 *\left(\frac{1.05}{1.12}\right)+\cdots+ 750 *\left(\frac{1.05}{1.12}\right)^T \\ & = 750+ 750\left[\frac{1}{0.12-0.05}-\frac{1}{0.12-0.05} \times\left(\frac{1.05}{1.12}\right)^T\right]\end{aligned} </math>...")
Exercise
ABy Admin
Dec 04'23
Answer
Use growing annuity formula assuming that the payments are made at the begining of each year and you pay in full for the year that you die (unfortunately). The value if you have an expected life of T years is:
[[math]]\begin{aligned} P V & = 750+ 750 *\left(\frac{1.05}{1.12}\right)+\cdots+ 750 *\left(\frac{1.05}{1.12}\right)^T \\ & = 750+ 750\left[\frac{1}{0.12-0.05}-\frac{1}{0.12-0.05} \times\left(\frac{1.05}{1.12}\right)^T\right]\end{aligned}
[[/math]]
Solve for T . The breakeven point is T >= 16
References
Lo, Andrew W.; Wang, Jiang. "MIT Sloan Finance Problems and Solutions Collection Finance Theory I" (PDF). alo.mit.edu. Retrieved November 30, 2023.