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Unformatted text preview: UGBA 103 Midterm Solutions 2009-10-16 Multiple choice questions: 1. E 2. E 3. A 4. D 5. C 6. E 7. B 8. D Long questions: 1. We are given that IRR A = 12 . 61% and NPV A = Yen 12 , 030, and need to say something (if we can) about NPV B and IRR B . Let C 1 ,...,C T be bank As cash flows. Then bank Bs cash flows are- C 1 ,...,- C T , and it must be the case that IRR B = IRR A : 0 = T summationdisplay t =1 C t (1 + IRR A ) t 0 = T summationdisplay t =1- C t (1 + IRR A ) t = IRR A = IRR B i.e. it must be the case that the IRR for firm B is the same: IRR B = IRR A = 12 . 61%. Regarding NPV, whatever the cash flows exchanged by the banks are, they have the same risk, so they should have the same discount rate in calculating both NPV A and NPV B . So the only difference in NPV is the sign of the cash flows, and this means that NPV B =- NPV A =- Yen 12 , 030. 2. We want to find the rate r such that the present value of future subscription payments (10 for 480 months) is 500: 500 = 10 r bracketleftbigg 1- 1 (1 + r ) 480 bracketrightbigg so you could just solve that directly on a graphing calculator. But we can also write the NPV of buying the lifetime subscription: the cost is 500 today, the...
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This note was uploaded on 12/16/2009 for the course UGBA 08547 taught by Professor Odean during the Fall '09 term at University of California, Berkeley.
- Fall '09