Week_3_solutions - 1 WEEK 3 SOLUTIONS TUTORIAL QUESTIONS 1...

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1 WEEK 3 - SOLUTIONS TUTORIAL QUESTIONS 1. KZB 8.1 Problem 6, p.224 (Attempt this problem using your calculator first, then check the result using Excel.) Which of the following projects should a company choose if each proposal costs $5000 and the cost of capital is 10% p.a.? End-of-year cash flow Year 1 Year 2 Year 3 Year 4 Year5 Project A $20 000 $10 000 $5 000 $10 000 $20 000 Project B $5 000 $20 000 $20 000 $20 000 $5 000 Answer: Set up a spreadsheet for your calculations. Check your answers using the inbuilt NPV function. Excel output. Formula in B11 is =NPV(B9,B3:B7)+B2 A B C 1 Project A Project B 2 0 -50000 -50000 3 1 20000 5000 4 2 10000 20000 5 3 5000 20000 6 4 10000 20000 7 5 20000 5000 8 9 rate 0.1 0.1 10 11 NPV -$548.58 $2,865.55 Project B has the greater NPV of $2866 to the nearest dollar. 2. (Adapted from QMA final exam, June 2000) Sam, a 20 year old graduate, has just found his first full-time job. An investment analyst suggests that he should try to have a substantial amount saved by the time of his planned retirement on his 65 th birthday. The analyst presents a comparison between two savings plans.
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