Question: The following question needs to be solved graphically, explaining the economic and financial intuition of these graphs. Assume that you have two cash flows, one

The following question needs to be solved graphically, explaining the economic and financial intuition of these graphs.

Assume that you have two cash flows, one for time t0 and the other for time t1:

F0=10000

F1=15000

Assume that the interest rate (your opportunity cost of capital) is 10%.

1. If you decide to smooth your consumption borrowing money based on a 20% decrease of future consumption. What should be the total money available for consumption at t0?

2. If the interest rate is 14% or 6%, how these different rates would impact your smoothing process? Which of the three scenarios would be more advantageous for you?

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