QUESTION 1:

a. If the market interest rate is 8% and the current inflation-free interest rate is 4.85%,

what is the inflation rate? [3 points]

b. The Transocean Inc. plans to make a five-year period payment to offset its one bad

debt in an account. The payments begin with a $3,000 payment at the end of the

first year. The payments then increase at the rate of 2% per year. Assume that the

average general inflation rate is 8%, and the market interest rate is 4% during this

five-year period.

Calculate the inflation free interest rate. [3 points]

What is the equivalent present worth of the automobile? [4 points]