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Homework01 - IE4700 Introduction to Financial Engineering...

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IE4700 Introduction to Financial Engineering Xuedong He, Spring 2011 Homework Set 1 (Due Jan. 27) Reading [L] Ch2: Section 1-4; Ch3: Section 1-8. ( [ L ] refers to Investment Science by David L uenberger. ) Assignment 1. [L] Chapter 2: Exercise 6 (Sunk costs) A young couple has made a nonrefundable deposit of the first month’s rent (equal to $1,000) on a 6-month apartment lease. The next day they find a different apartment that they like just as well, but its monthly rent is only $900. They plan to be in the apartment only 6 months. Should they switch to the new apartment? What if they plan to stay 1 year? Assume an interest rate of 12% and the rent is paid at the beginning of each month . 2. [L] Chapter 2: Exercise 8 (Copy machines) Tow copy machines are available. Both have useful lives of 5 years. One machine can be either leased or purchased outright; the other must be purchased. Hence there are a total of three options: A, B, and C. The details are shown in Table 2.6. (The first year’s maintenance is included in the initial cost. There are then four additional maintenance payments, occurring at the
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