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CHE374F-Quiz03-Sol-2009

# CHE374F-Quiz03-Sol-2009 - to be \$48 On the other hand if...

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Page 1 of 1 CHE374F Engineering Economic Analysis Quiz #3, October 21, 2009 Name: Student Number: Tutorial Rm: GB 1. You are asked to price a project cash flow for a project that is currently in the R&D stage. There is a 30% chance that the technology will be exceed expectations, 50% chance that it will match expectations and a 20% chance that it will fail. If the market does well, the cash flow from the project will be \$80 if the technology exceeds expectations, \$50 if the technology meets expectations and \$0 if the technology fails. If the market goes down, then the respective project cash flows will be \$30, \$15 and \$0. The current market index is priced at \$40. There is a 60% chance the market will do well and if it does so, the price is expected
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Unformatted text preview: to be \$48. On the other hand, if the market does poorly, the expected price is \$35. The risk-free rate for the period is 2%. What is a fair price for the project? 80*.3+50*.5+0*.2 = 49 30*.3+15*.5+0*.2 = 16.5 Invest A in the market and B in the risk-free investment: A*48 + B*102 = 49 A*35 + B*102 = 16.5 A = 2.5 B = -0.6961 Fair price = 40*A+100*B = 30.3922 2. Given two stocks in the market with the following current pricing and expected pricing in two potential future states, determine the risk-free rate. Current Price Price if Market Goes Up Price if Market Goes Down Stock 1 31 40 20 Stock 2 60 80 30 A*40 + B*80 =100* (1+r) A*20 + B*30 = 100*(1+r) A*31 + B*60 = 100 A = 14.29 B = -5.71 r = .1429 49 ? 16.5...
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