This is topic Looking for help with economics! in forum Books, Films, Food and Culture at Hatrack River Forum.

To visit this topic, use this URL:
http://www.hatrack.com/ubb/main/ultimatebb.php?ubb=get_topic;f=2;t=038117

Posted by aiua (Member # 7825) on :

Assume the interest rate is 5%.
If you were given \$5 a year for eternity, how much would this be worth?

Is there a formula to calculate present value of an asset which produces a yearly stream of income?

Posted by MrSquicky (Member # 1802) on :

Yes, there is. However, this really sounds like you tryign to get people to do your homework for you, which is not something we do here.

Posted by aiua (Member # 7825) on :

Sorry, it's not homework. It's something that was explained poorly in the book and I was hoping for a better explanation.

Posted by El JT de Spang (Member # 7742) on :

Let me ask you a question: if I give you a dollar a year for eternity, how much money will you have at eternity?

Posted by aiua (Member # 7825) on :

1n?

Posted by El JT de Spang (Member # 7742) on :

What's n? Are you supposed to just present the formula where n equals the year between here and eternity, or are you actually supposed to come up with an answer?

Posted by El JT de Spang (Member # 7742) on :

You should be given the formulas in the text, but the one you need is here.

Posted by aiua (Member # 7825) on :

We're trying to figure out worth, more or less what we'd pay for it today.

What I was thinking was:
[cost of the object] x [interest rate] = [yearly income from object]->
[cost] x .05 = \$5
So the cost would be \$100, right?

But now I'm a bit confused because I would have thought it'd be worth more than that. That and I'm not sure what purpose the interest rate serves.

Posted by El JT de Spang (Member # 7742) on :

Just do it manually for like 3 years and you'll see what the interest rate is for.

Year one: \$5.25
Year two: (5.25[yr1money] + 5.00[yr2money]) * 0.05[interest] = whatever
Year three: (whatever[yr2money] + 5.00[yr3money]) * 0.05[interest] = whatever2

See, the total money is added to the new money, and then the interest is paid on both.

Posted by aiua (Member # 7825) on :

Ah. Thank you very vey much. ^-^