Finance 300 Assignment 2

Assignment 2

Assignment 2 is due after you complete Lessons 5 to 8. It is worth 20% of your final grade.

Prepare your responses to these assignment problems in a word processing file; put financial data in a spreadsheet file. As you complete the assignment problems for each lesson, add your responses to these files.

Do not submit your answers for grading until you have completed all parts of Assignment 2.

Note: In assignments, show all calculations to 4 decimal places.

Spreadsheets are provided on the Assignment 2 page of the course website to help you complete Assignment 2.

Lesson 5: Assignment Problems

5.1 Assume you have $1 million now, and you have just retired from your job. You expect to live for 20 years, and you want to have the same level of consumption (i.e., purchasing power) for each of these 20 years, after adjusting for inflation. You also wish to leave the purchasing power equivalent of $100,000 today to your kids at the end of the 20 years as a bequest (or to pay them to take care of you).

You expect inflation to be 3% per year for the next 20 years, and nominal interest rates are expected to stay around 8% per year.

| Inflation Rate | Investment Rate | Current Consumption | |

| 0.03 | 0.08 | 100,000 | |

| Savings |   |   | Savings |

| Open | Earnings | Consumption | Close |

1 | 500,000 | 40,000 | 103,000 | 437,000 |

2 | 437,000 | 34,960 | 106,090 | 365,870 |

3 | 365,870 | 29,270 | 109,273 | 285,867 |

4 | 285,867 |...