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Week 9 Solutions

# Week 9 Solutions - Week 9 Solutions Chapter 2 14 Assuming...

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Week 9 Solutions Chapter 2 14. Assuming that the intermediate cash flows are reinvested at 10%, the Fvs / internal rates of return, are: (a) (i) \$15,300 / 10% PV 9,500 N 5 I/Y 10 FV \$15,300 Internal rate of return = 10% (ii) \$14,717 / 4.3785 for 6 mo., 8.95% EAR FV (yr 5) = FVA 375 (10, 5%) + 10,000 = 4,717 + 10,000 = \$14,717 FV = 14,717 PV = -9,500 N = 10 Internal rate of return = 4.3785% (for 6 months, EAR = 8.95%) (iii) \$15,553 / 10.36% FV (yr5) = FV (200) + FV (400) + FV (800) + FV (1600) + FV (2,500 + 9,500) = 292.82 + 532.40 + 968 + 1,760 + 12,000 = \$15,553 FV = 15,553 PV = -9,500 N = 5 Internal rate of return = 10.36% Based on the future values shown above, choose (iii).

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(b) The risk of the investment should be considered. (iii) has the highest risk and (i) has the lowest. Other factors might include differential taxes on the different investments, and marketability of the investments. Chapter 14 4. (a) Goal = \$3,000,000; PV = \$26,000; N = 32 I/Y = 16% p.a. [Goal = FV (PV \$26,000, N =32)] (b) Suppose he has a tax rate of 40%. Then, his required before-tax return is .16/.6 = 26.7%. Investments offering this rate of return are very scarce, and very risky. This answer is anticipating Chapters 14-16 a bit. The instructor might suggest that the students look at
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