1
ENG 106
Homework #7 Solutions
Winter 2012
Due:
Wed, Feb 29, 3 pm, HW box
7.8 An investor bought 100 shares of stock at a cost of $10 per share. He held the stock for 15
years and then sold it for a total of $4,000. For the first three years, he received no dividends. For
each of the next seven years, he received total dividends of $50 per year. For the remaining
period, he received total dividends of $100 a year. What rate of return did he make on the
investment?
PW(i) = -$1000 + ($50(F/A,i%,12)+$50(F/A,i%,5)+$4,000)]*(P/F,i%,15)
Set PW = 0, then solve for
ι
,
ι
=12.08%, using EXCEL IRR function.
7.10 Consider the following projects
Net Cash Flow
n
A
B
C
D
0
-$1500
-$1200
-$2000
-$2700
1
$500
$800
$5600
$360
2
$100
$600
$4900
$4675
3
$100
$500
-$3000
$2288
4
$1000
$700
-$7000
5
-$1400
6
$2100
7
$900
(a)
Classify each project as either simple or nonsimple
A, B, and D are simple projects (only one change in sign of cash flows), C is nonsimple.
(b)
Identify all positive i*s for each project
A: 1500(F/P, i*,4) = 500(F/P, i*,3)+100(F/P, i*,2)+100(F/P, i*,1)+1000
Project A:
ι
*=4.4%
B: 1200(F/P, i*,4) = 800(F/P, i*,3)+600(F/P, i*,2)+500(F/P, i*,1)+700
Project B:
ι
*=42.%
For Project C, one approach is to use EXCEL IRR with different guesses for i:
=IRR(flow
0
:flow
n
, guess for i*).
Project C: