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Show excel formulas if used. If possible can you make calculations in blue and solution in...

Show excel formulas if used. If possible can you make calculations in blue and solution in red

1. Harry Harrison has purchased a certificate of deposit (CD) from his bank that pays an annual interest rate of 2.50% compounded daily. What is the effective annual rate (EAR) on this CD?

2. Arbor Corporation is considering a new three-year expansion project that requires an initial fixed asset investment of $280,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will have no market value. The project is expected to generate $292,000 in annual sales. Variable costs are 40% of sales and fixed costs are projected to be $31,700 per year. Assume no change in net working capital (NWC) due to the project. If the tax rate is 21% and the hurdle rate is 15%, what is the project's NPV?

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Answer #1

1.

Compute the effective annual rate (EAR), using the equation as shown below:

EAR = {(1 + Rate/ Compounding period)^Compounding period} – 1

         = {(1 + 0.025/365)^365} – 1

         = {(1 + 0.0000068193155)^365} – 1

         = 1.02531424247 – 1

         = 2.531424247%

Hence, the EAR is 2.531424247%.

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