Question

1. Mia Salto wishes to determine how long it will take to repay a loan with initial proceeds of $5000 where annual end-of-year installment payments of $650 are required. a. If Mia can borrow at an annual interest rate of 7 %, how long will it take for her to repay the loan fully? b. How long will it take if she can borrow at an annual rate of 6 %? c. How long will it take if she has to pay 9 % annual interest? d. Reviewing your answers in parts a , b , and c , describe the general relationship between the interest rate and the amount of time it will take Mia to repay the loan fully.

2. Laura Drake wishes to estimate the value of an asset expected to provide cash inflows of $ 2400 per year at the end of years 1 through 4 and $13747 at the end of year 5. Her research indicates that she must earn 11 % on low-risk assets, 13 % on average-risk assets, and 24 % on high-risk assets. a. Determine what is the most Laura should pay for the asset if it is classified as (1) low-risk, (2) average-risk, and (3) high-risk. b. Suppose Laura is unable to assess the risk of the asset and wants to be certain she's making a good deal. On the basis of your findings in part a , what is the most she should pay? Why? c. All else being the same, what effect does increasing risk have on the value of an asset? Explain in light of your findings in part a.

3. Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have $1000 par values and 11 % coupon interest rates and pay annual interest. Bond A has exactly 9 years to maturity, and bond B has 19 years to maturity. a. Calculate the present value of bond A if the required rate of return is: (1) 8 %, (2) 11 %, and (3) 14 %. b. Calculate the present value of bond B if the required rate of return is: (1) 8 %, (2) 11 %, and (3) 14 %. c. From your findings in parts a and b , discuss the relationship between time to maturity and changing required returns. d. If Lynn wanted to minimize interest rate risk, which bond should she purchase? Why?

4. Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have $1000 par values and 11 % coupon interest rates and pay annual interest. Bond A has exactly 9 years to maturity, and bond B has 19 years to maturity. a. Calculate the present value of bond A if the required rate of return is: (1) 8 %, (2) 11 %, and (3) 14 %. b. Calculate the present value of bond B if the required rate of return is: (1) 8 %, (2) 11 %, and (3) 14 %. c. From your findings in parts a and b , discuss the relationship between time to maturity and changing required returns. d. If Lynn wanted to minimize interest rate risk, which bond should she purchase? Why?

5. Acme Oscillators is considering an investment project that has the following rather unusual cash flow pattern. Year Cash Flow 0 yr $101 1yr -461 2yr 789 3yr -602.2 4yr 171.6

a. Calculate the project's NPV at each of the following discount rates: 0 %, 5 %, 10 %, 20 %, 30 % , 40 %, 50 %. b. What do the calculations tell you about this project's IRR? The IRR rule tells managers to invest if a project's IRR is greater than the cost of capital. If Acme Oscillators' cost of capital is 8 %, should the company accept or reject this investment? c. Notice that this project's greatest NPVs come at very high discount rates. Can you provide an intuitive explanation for that pattern?

6. Rieger International is attempting to evaluate the feasibility of investing $96,000 in a piece of equipment that has a 5 -year life. The firm has estimated the cash inflows associated with the proposal as shown in the following table:

(Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.)

Year (t )	Cash inflows (CF)
1	$20,000
2	$40,000
3	$40,000
4	$20,000
5	$30000

. The firm has a 99 % cost of capital.

a. Calculate the payback period for the proposed investment.

b. Calculate the net present value (NPV) for the proposed investment.

c. Calculate the internal rate of return (IRR), rounded to the nearest whole percent, for the proposed investment.

d. Evaluate the acceptability of the proposed investment using NPV and IRR. What recommendation would you make relative to implementation of the project?

Answer 1

1)

Given

Loan Amount P=$5000

Per Year Installment payment A=$650

let n be the number of years for full payment

and r is annual interest rate than

as we know

P=A*(1-(1+r)^-n)/r

A) for r=7%

5000=650*(1-(1+7%)^-n)/7%

-n*ln(1.07)=ln(0.46)

n=11.48 years (around 11 years and 6 month)

B) for r=6%

5000=650*(1-(1+6%)^-n)/6%

-n*ln(1.06)=ln(0.54)

n=10.57years (around 10 years and 7 months)

C)

for r=9%

5000=650*(1-(1+9%)^-n)/9%

-n*ln(1.09)=ln(0.31)

n=13.59 years (around 13 years and 7 months)

D) from above calculation we found that as the value of annual interest rate increases , the amount of time to full pay the loan also increases