Summary of 5 Types of Problems Invest and Earn Problem All Cost Alternatives Problem Incremental Investments Competing Investments Problem Unit Cost Problem.

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Summary of 5 Types of Problems Invest and Earn Problem All Cost Alternatives Problem Incremental Investments Competing Investments Problem Unit Cost Problem

Basics Needed Identify the investor and build a cash flow showing money in and out of his pocket Identify the point of decision and put the pot at that location –identify needed locations for any temporary pots

The Six Magic Numbers P/F F/P P/A A/P F/A A/F There are a few other minor numbers

Interest Rates Interest Rates are almost always reported annually –can be adjusted to other compounding periods so they can be used as i in magic numbers –Example - Convert to Monthly Interest Annual Rate% / 12 (convert to months) / 100 (convert from percent to fraction)

Components of Interest Safe Rate (about 2%) Inflation Rate (now around 4%) Risk Premium (depends on investment) Motivation Premium (usually small) Dealt with by Multiplication –(1.02)(1.04)(1.09)(1.001) = –15.74% If inflation is not included = Real Rate If inflation is included = Nominal Rate