1. You are given three investment alternatives to analyze. The cash flows from these three investments are as follows:

Investment

End of year A B C

1 $10,000 $10,000

2 10,000

3 10,000

4 10,000

5 10,000 $10,000

6 10,000 10,000 50,000

7 10,000

8 10,000

9 10,000

10 10,000 10,000

Assuming a 20 percent discount rate, find the present value of each investment.

Question 2.

Determine the present value of an ordinary annuity of $1,000 per year for 10 years with the first cash flow from the annuity coming at the end of year 8 (that is, no payments at the end of years 1 through to 7 and annual payments are at the end of year 8 through 17) given a 10 percent discount rate.

Question 3.

Clevenger Manufacturing, Inc., has prepared the following information regarding two investments under consideration. Which investment should be accepted? Calculate expected return and standard deviation.

Common Stock A Common Stock B

Probability Return Probability Return

.20 10% .15 6%

.60 13% .30 8%

.20 20% .40 15%

.15 19%

Question 4.

Arizona Public Utilities issued a bond that pays $80 in interest, with a $1,000 par value. It matures in 20 years. Your required rate of return is 7 percent.

1. Calculate the value of the bond.

2. How does the value change if your required rate of return (i) increases to 10 percent or (ii) decreases to 6 percent?

3. Explain the implications of your answers in part (b) has they relate to the interest rate risk, premium bonds and discount bonds.

4. Assume that the bond matures in 10 years instead of 20 years. Recomputed your answers in part (b).

5. Explain the implications of your answers in part (d) as they relate to interest rate risk, premium bonds, and discount bonds.