1. Assume that a machine has a useful life of 11 years, and it loses its real value at a constant rate (i.e. 1/11 of the original value per year). At a 3% interest rate, and including depreciation in the calculation, over a 5 year period a $100,000 investment must earn at least approximately ____ to be economically viable.
2. What’s the interest rate of a 5 year, annual $4,600 annuity with present value of $20,000.
3. A pension fund owes $1,000,000 in 9 years. To fund this outflow, the insurer wishes to buy STRIPS that match in duration. The STRIPS have a $10,000 face value per STRIP and pay a 8 percent APR with semiannual compounding. How much must the pension fund spend now to fully fund the outflow?