Answer to Question #250946 in Economics for Bob

Question

G&G Consulting has just realized an accounting error that has resulted in an unfunded liability of $455,950 due in 35 years.  In other words, the company will need $455,950 in 35 years.  Dave Green, the company’s CEO, is scrambling to discount the liability to the present to assist in valuing the firm’s stock.  If the appropriate discount rate is 9 percent, what is the present value of the liability? (round to the nearest $1). (40 points)

QUESTION #3

Suppose you would like to buy a house that is currently on the market at $95,000, but you cannot afford it right now. However, you think that you would be able to buy it after 5 years. If the expected inflation rate as applied to the price of this house is 9% per year, what is its expected price after five years? (round to the nearest decimal place)

Answer 1

2. The present value of the liability is:

$PV = 455,950/1.09^{35} = 22,335.$

3. Its expected price after five years is:

$FV = 95,000×1.09^5 = 146,169.3.$