1. A firm needs to choose between two projects, A and B. Project A involves an initial outlay of $13 500 and yields $18 000 in 2 years’ time. Project B requires an outlay of $9000 and yields $13 000 after 2 years. Which of these projects would you advise the fi rm to invest in if the annual market rate of interest is 7%?

2. A project requires an initial investment of $12 000. It has a guaranteed return of $8000 at the end of year 1 and a return of $2000 each year at the end of years 2, 3 and 4. Estimate the IRR to the nearest percentage. Would you recommend that someone invests in this project if the prevailing market rate is 8% compounded annually?

3. A 10-year bond is originally of ered by the government at $1000 with an annual return of 7%. Assuming that the bond currently has 3 years left before redemption and that the prevailing interest rate is 8% compounded annually, calculate its present value.