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are155-homework-7

are155-homework-7 - University of California Davis...

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University of California, Davis Department of Agricultural and Resource Economics “We are what we repeatedly do. Excellence then is not an act, but a habit.” Aristotle Copyright c 2010 by Quirino Paris. ARE 155 Winter 2010 Prof. Quirino Paris HOMEWORK #7 Due Tuesday, February 23 1. An investor contemplates the allocation of an initial sum of $200,000 dollars among two long-term projects, a municipal bond, and annual certificates of deposits. Her objective is to maximize investment returns over a horizon of three years. The first long-term project requires an expenditure of $20,000 and $10,000 during the first two years, respectively, while during the third year it begins to yield an income of $7,000. At the beginning of the fourth year, Project 1 is worth $60,000. Project 2 requires a cash expenditure in each of the first three years in the sum of $12,000, $15,000 and $18,000, respectively. At the beginning of the fourth year, project two is worth $70,000. The municipal bond has a life of three years and yields an annual return of 7.0% (The interest accrued each year can be cashed and reinvested, while the principal will be available only at the end of the third year). The annual certificates of deposit
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