Chapter007 - The Theory of Interest - Solutions Manual...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon

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

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: The Theory of Interest - Solutions Manual Chapter 7 1. The maintenance expense at time 6 t = is ( 29 6 0 3000 1.06 4255.56- = . The projected annual return at time 6 t = is ( 29 6 1 30,000 .96 24,461.18- = . Thus, 6 24,461.18 4255.56 $20,206 to the nearest dollar. R =- = 2. ( a ) ( 29 2 3 7000 4000 1000 5500 . i i i v v v P i = - +- + Thus, ( 29 ( 29 ( 29 ( 29 2 3 .09 1000 7 4 .91743 .91743 5.5 .91743 75.05. P =- +- + = ( b ) ( 29 ( 29 ( 29 ( 29 2 3 .10 1000 7 4 .90909 .90909 5.5 .90909 57.85. P =- +- + = - 3. Net cash flows are: Time NCF 3000 1 2000 1000 = 1000 2 4000 The IRR is found by setting ( 29 P i = , i.e. ( 29 ( 29 2 2 3000 1000 4000 4 3 4 3 1 v v v v v v- + + = +- =- + = so that 3 , 4 v = rejecting the root 1. v = - Finally, 4 1 , 3 i + = and 1 , 3 i = so 3. n = 4. The equation of value equating the present values of cash inflows and cash outflows is 5 10 5 2,000,000 600,000 300,000 at 12% Xv a a i + =- = . Therefore, ( 29 5 10 5 600,000 300,000 2,000,000 1.12 $544,037. X a a =-- = 5. Project P: ( 29 2 4000 2000 4000 . v v P i = - + + Project Q: ( 29 2 2000 4000 . v Xv P i = +- Now equating the two expressions, we have ( 29 ( 29 ( 29 ( 29 2 2 4000 2000 6000 0 4000 2000 1.1 6000 1.1 X v v X +-- = +-- = and 2200 7260 4000 $5460. X = +- = 73 The Theory of Interest - Solutions Manual Chapter 7 6. ( a ) This Exercise is best solved by using the NPV functionality on a financial calculator. After entering all the NCFs and setting I 15%, = we compute ( 29 NPV .15 $498,666. P = = - ( b ) We use the same NCFs as in part ( a ) and compute IRR 13.72% = . 7. ( a ) The formula for ( 29 P i in Exercise 2 has 3 sign changes, so the maximum number of positive roots is 3. ( b ) Yes. ( c ) There are no sign changes in the outstanding balances, i.e. 7000 to 3000 to 4000 at 0. i = Taking into account interest in the range of 9% to 10 % would not be significant enough to cause any sign changes. 8. The equation of value at time 2 t = is ( 29 ( 29 ( 29 ( 29 2 2 100 1 208 1 108.15 0 1 2.08 1 1.0815 r r r r +- + + = +- + + which can be factored as ( 29 [ ] ( 29 [ ] 1 1.05 1 1.03 . r r +- +- Thus, .05 r = and .03, so that .02. i j- = 9. Using one equation of value at time 2, t = we have ( 29 ( 29 ( 29 ( 29 2 2 1000 1.2 1.2 1000 1.4 1.4 A B A B + + = + + = or 1.2 1440 1.4 1960. A B A B + = - + = - Solving two equations in two unknowns gives 2600 A = - and 1680. B = 10. ( a ) Adapting formula (7.6) we have: Fund A: 10,000 Fund B: ( 29 ( 29 ( 29 ( 29 5 5 .04 600 1.04 600 5.416323 1.216653 3953.87 s = = Fund C: ( 29 ( 29 5 .05 600 600 5.525631 3315.38 s = = . A+B+C = 10,000 3953.87 3315.38 $17,269 + + = to the nearest dollar....
View Full Document

This document was uploaded on 12/10/2011.

Page1 / 14

Chapter007 - The Theory of Interest - Solutions Manual...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online