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Unformatted text preview: University of California, Davis Department of Agricultural and Resource Economics We are what we repeatedly do. Excellence then is not an act, but a habit. Aristotle Copyright c 2011 by Quirino Paris. ARE 155 Winter 2011 Prof. Quirino Paris HOMEWORK #7 Due Tuesday, February 22 1. An investor contemplates the allocation of an initial sum of $200,000 dollars among two long-term projects, a municipal bond, and annual certificates of deposits. Her objective is to maximize investment returns over a horizon of three years. The first long-term project requires an expenditure of $20,000 and $10,000 during the first two years, respectively, while during the third year it begins to yield an income of $7,000. At the beginning of the fourth year, Project 1 is worth $60,000. Project 2 requires a cash expenditure in each of the first three years in the sum of $12,000, $15,000 and $18,000, respectively. At the beginning of the fourth year, project two is worth $70,000. The municipal bond has a life of three years and yields an annual return of 7.0% (The interest accrued each year can be cashed and reinvested, while the principal will be available only at the end of the third year). The annual certificates of depositwill be available only at the end of the third year)....
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