Midterm Solutions

Midterm Solutions - E120 Midterm Solution Summer 2007...

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Unformatted text preview: E120 Midterm Solution Summer, 2007 Question 1 APR = 12% compounded monthly ⇒ monthly interest rate is r = 1%. Quarterly interest rate: r q = (1 + 1%) 3- 1 = 0 . 0303; Annual interest rate: EAR = (1 + 1%) 12- 1 = 0 . 1268. To decide which investment to make, we need to evaluate the present values of the cash flow related to each investment. If invest in Hi-Tech venture: Invest $30 , 000 at t = 0; From t = 0 to t = 20, get profit of $3 , 000 ; At t = 20, get $45 , 000 from selling the venture. The time internal for this cash flow is quarter. Thus, PV H =- 30000 + 3000 1- (1+0 . 0303)- 20 . 0303 + 45000 . 0303 20 = 39278 . 70 If invest in Restaurant: At t = 0 invest $30 , 000; At t = 1 invest another $10 , 000; From t = 3 to t = 7, get profit of $10 , 000; At t = 7, get $70 , 000 by selling the restaurant. The time internal for this cash flow is annual. Thus PV R =- 30000 + 10000 1 + 0 . 1268 + 10000 1- (1 + 0 . 1268)- 5 . 1268 1 (1 + 0 . 1268) 2 + 70000 (1 + 0 . 1268) 7 = 19388 . 06 1 Since the cash flow of investing Hi-Tech venture have higher present value, she...
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This note was uploaded on 01/25/2011 for the course E 120 taught by Professor Alder during the Spring '08 term at Berkeley.

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Midterm Solutions - E120 Midterm Solution Summer 2007...

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