ECN801, V. Bardis
Problem Set 7
1. (Similar to 7.32) A company that makes clutch disks for race cars had the cash flows shown below for
one department. (a) State the equation for calculating the ROR of the project using the discount factor
δ
=1/(1+i).
(b) Suppose the real solutions of this equation (i.e., values of the discount factor) are .77735,
2.2711, 1.1049, 2.7769. What is the project’s ROR? (c) What is the project’s composite rate of return,
using a reinvestment rate of 15% per year.
Year
Cash Flow, $1000
0
–65
1
30
2
84
3
–10
4
–12
2. (7.33) For the cash flow series below, calculate the composite rate of return, using a reinvestment rate
of 14% per year.
Year
Cash Flow, $
0
3000
1
–2000
2
1000
3
–6000
4
3800
3. (7.36) A $10,000 mortgage bond with a bond interest rate of 8% per year, payable quarterly, was
purchased for $9200. The bond was kept until it was due, a total of 7 years. What rate of return was
made by the purchaser per 3 months and per year (nominal)?
4. (7.38) A collateral bond with a face value of $5000 was purchased by an investor for $4100. The bond
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 Winter '11
 Panzer
 Net Present Value, Internal rate of return

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