{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

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

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
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).
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
(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
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern