Question

6. A firm has a capital budget of $100 which must be spent on one of two projects, with any unspent balance being placed in a bank deposit earning 15%. Project A involves a present outlay of $100 and yields $321.76 after 5 years. Project B involves a present outlay of $40 and yields $92 after one year. Calculate:

(i) the IRR of each project;

(ii) the B/C ratio of each project, using a 15% discount rate.

What are the project rankings on the basis of these investment decision rules? Suppose that if Project B is undertaken its benefit can be reinvested at 17%; what project should the firm choose? Show your calculations (spreadsheet printout is acceptable as long as entries are clearly labelled).

7. ​Aaden takes a loan of $250,000 today. He will make payments every two years, starting two years from today, until the loan is paid back 30 years from today. If the effective annual interest rate is 16%, how much will each payment be?

8.​A bond has a face value of $750. It pays a coupon of 10% of the face value today, one year from today, and two years from today. Two years from today, the bond matures and it pays the face value. If the current selling price of the bond is $800, what is the yield to maturity? (Hint: Yield to maturity - The interest rate that equates the present value of cash flow payments received from a debt instrument with its value today)

Answer 1