(a)

Asset A Asset B

Initial investment $ 10 000 $ 10 000

Annual rate of return

pessimistic 13% 7%

most likely 15% 15%

optimistic 17% 23%

if the investor is risk averse, which assert will he select?

(b)

a firm is evaluating two project:

Project A and project B. the following details are given.

Project A Project B

Cash flow ($) CEC Cash flow ($) CEC

Initial Investment (42 000) 1.00 (45 000) 1.00

1. 14 000 0.90 28 000 1.00
2. 14 000 0.90 12 000 0.90
3. 14 000 0.80 10 000 0.90
4. 14 000 0.70 10 000 0.80
5. 14 000 0.60 10 000 0.70

which project will you recommend using the certainty equivalent method assuming a risk-free rate of return is 6%?

(C)

you have been asked if you can lend $ 10 000 to transport company in order that it may expand its fleet of taxis. the money would be repaid at the rate of $3 000 per annum for four years. what is the IRR?

1. step one is to select a rate that may be approximately correct. the choice of the second rate to use would depend on how close to zero the first attempt came, and on whether the NPV it gave was positive or negative. the rate of 8% is used.