Question
4) You plan to invest $2,000 in an individual retirement arrangement today at a nominal annual rate of 8 %, which is expected to apply
4) You plan to invest $2,000 in an individual retirement arrangement today at a nominal annual rate of 8 %, which is expected to apply to all future years.
a. How much will you have in the account at the end of 11 years if interest is compounded (1) annually, (2) semiannually, and (3) daily (assume a 365-day year)?
b. What is the effective annual rate, EAR, for each compounding period in part a ?
a.
(1)The amount you will have in the account at the end of 11 years if interest is compounded annually is $___________.
(2)The amount you will have in the account at the end of 11 years if interest is compounded semiannually is $ ______.
(3)The amount you will have in the account at the end of 11 years if interest is compounded daily is $__________.
b.
(1)If the 8 % nominal rate is compounded annually, the EAR is_____ %.(Round to two decimal places.)
(2)If the 8 % nominal rate is compounded semiannually, the EAR is _____%. (Round to two decimal places.)
(3)If the 8 % nominal rate is compounded daily, what is the EAR is_____%.(Round to two decimal places.)
8) 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? ProjectA/B?
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