1. Since 1 Sept 2010, Cathy's investment policy has been to lodge fixed (term) deposits at her local bank. The bank pays interest on the maturity date of a deposit and the interest rate is expressed as an annual simple interest rate. When a deposit matures, Cathy's policy is to re-lodge the whole sum (principal and interest) immediately for a further period. She chooses the term of each deposit according to her assessment of the interest rates available at that time. Cathy's decisions to date are as follows:

Date Decision

1 Sept 2010 6-month deposit at 9% per annum

1 March 2011 8-month deposit at 9.15% per annum1 November 2011 10-month deposit at 8.75% per annum

Calculate, as at 1 Sept 2014, the effective annual interest rate Cathy has earned since she began this policy. (Assume that all months are of equal length.) Briefly explain each step.

2. The Three-Dot Mining Company has constructed a town at Big Bore. The town will be abandoned when mining operations cease after an estimated 5-year period. The following estimates of investment costs, sales and operating expenses relate to a project to supply Big Bore with meat and agricultural produce over the 5-year period by developing nearby land.

1)Investment in land is $8 million, farm buildings $2 000 000 and farm equipment $3 000 000. The land is expected to have a realisable value of $4 000 000 in 5 years' time. The residual value of the buildings after 5 years is expected to be $400 000. The farm equipment has an estimated life of 5 years and a zero residual value.

2)Investment of $2 300 000 in current assets will be recovered at the termination of the venture.

3)Annual cash sales are estimated to be $21million.

4)Annual cash operating costs are estimated to be $18 million.

Is the project profitable, given that the required rate of return is 10 per cent per annum?

3.Using the following data, calculate the:

1)Accounting rate of return

2)Payback period

3)Internal rate of return

4)Net present value

Project cost:

$150 000

Estimated life:

4 years

Estimated residual value:

$30 000

Annual net cash flow:

$40 000

Required rate of return:

9%

How would your answers differ if the net cash flows were as follows?

Year 1

$50 000

Year 2

$30 000

Year 3

$60 000

Year 4

$80 000

4. The standard deviations of returns on assets A and B are 12 per cent and 6 per cent, respectively. A portfolio is constructed consisting of 30 per cent in Asset A and 70 per cent in Asset B. Calculate the portfolio standard deviation if the correlation of returns between the two assets is:

1. 1
3. 0.5
5. 0
7. -1
9. Comment on your answers.