1-) You plan to invest $1,900 in an individual retirement arrangement today at a nominal annual rate of 7%, which is expected to apply to all future years.

a-) How much will you have in the account at the end of 9 years if interest is compounded (1) annually, (2) semiannually, and (3) daily (assume a 365-day year)?

(1)The amount you will have in the account at the end of 9 years if interest is compounded annually is $ .............

(2)The amount you will have in the account at the end of 9 years if interest is compounded semiannually is $ ..............

(3)The amount you will have in the account at the end of 9 years if interest is compounded daily is $ .............

b-) What is the effective annual rate, EAR, for each compounding period in part a?

(1)If the 7% nominal rate is compounded annually, the EAR is.................%.(Round to two decimal places.)

(2)If the 7% nominal rate is compounded semiannually, the EAR is..............%.(Round to two decimal places.)

(3)If the 7% nominal rate is compounded daily, what is the EAR is ...............%.(Round to two decimal places.)

2-) Projects 1 and 2, of equal risk, are alternatives for expanding X Company's capacity.The firm's cost of capital is 10%.The cash flows for each project are shown in the following table:

Project 1 Project 2

Initial investment $210,000 $180,000

Year Cash inflows

1 $55,000 $55,000

2 $60,000 $55,000

3 $65,000 $55,000

4 $70,000 $55,000

5 $75,000 $55,000

a-) The payback period of Project 1 is.......... years.

The payback period of Project 2 is .......... Years.

b-) The NPV of Project 1 is $..........

The NPV of Project 2 is $.........

c-)The IRR of Project 1 is .......%

The IRR of Project 2 is.........%

d-)Which project will you recommend? Project