Question

Problem 1. The construction of a hydroelectric dam will result in the permanent closure of a recreational park. The park has brought $4 million in revenues over the last two years. What is the expected total monetary loss under 4% annual interest rate if this park is permanently closed this year?

Problem 2. A 15-year municipal bond was issued 5 years ago. Its coupon interest rate is 8%, interest payments are made semi-annually, and its face value is $1,000. If the current market interest rate is 12.36% what should the price of the bond be? Note: The issuer of the bond makes interest payments to the bond holder at the coupon rate as well as a final payment.

Problem 3. A company has a new product whose sales are expected to be 1.2, 3.5, 7, 5 and 3 million units per year over the next five years. Production, distribution and overhead costs are stable at $120 per unit. The price of the product will be $200 per unit for the first two years and then $180, $160 and $140 for the next three tears. The upfront R&D and capital costs are $300 million. If market interest rate is 15%, what is the present worth of the new product?

Problem 4. On February 1, a private company needs to buy some office equipment. The company is short of cash and expects to be short for several months. The company treasurer has said that he could pay for the equipment as follows:

Date	Payment
April 1	$150
June 1	$300
August 1	$450
October 1	$600
December 1	$750

A local office supply firm will agree to sell the equipment to the firm now and accept payments according to the treasurer’s schedule. If interest charged is 3% per 2 month, with compounding once every two months, how much the company can spend on equipment now? Note: Solve it by (a) using arithmetic gradient series concept

Answer 1