Homework Answers
1)
Geometric average return = [(1 + R1)(1 + R2)(1 + R3)(1 + R4)(1 + R5)(1 + R6)]1/n - 1
Geometric average return = [(1 + 0.16)(1 + 0.04)(1 + 0.08)(1 + 0.14)(1 - 0.09)(1 - 0.05 )]1/6 - 1
Geometric average return = [1.16 * 1.04 * 1.08 * 1.14 * 0.91 * 0.95]1/6 - 1
Geometric average return = [1.284059]1/6 - 1
Geometric average return = 1.0426 - 1
Geometric average return = 0.0426 or 4.26%
2)
Net present value = Present value of cash inflows - present value of cash outflows
Net present value = -42,398 + 18,201 / (1 + 0.09)1 + 21,219 / (1 + 0.09)2 + 17,800 / (1 + 0.09)3
Net present value = $5,904.65
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