a) Consider an annuity of 7 cash flows of $5,000 payable annually. If the interest rate is 10 per cent per annum, what is the value of this annuity today if the first cash flow is to be paid immediately? [6 marks]

b) You are considering the purchase of a home for $500,000. You have available a deposit of $100,000. The bank will lend you money at 8 per cent per annum compounded monthly over a period up to 25 years. If you borrow the required funds over 25 years, what are the monthly repayments? After three years, how much do you still owe the bank? What is the interest component of the 24^th repayment?

[7 marks]

2. a) Perth Entertainment Ltd is expanding rapidly. Its dividend growth rate for the coming year is projected at 20 per cent. This rate will decline by 5 percentage points per year until it reaches the industry average of 5 per cent. Once it reaches 5 per cent, it will stay there indefinitely. The most recent dividend was $0.25 per share, and the market requires a return of 16 per cent on investments such as this one. What is the price per share for Perth Entertainment Ltd?

[12 marks]

3. a) Describe the main methods of project evaluation and explain their advantages and disadvantages. [7 marks]

b) Consider the following cash flows for two mutually exclusive investments:

	Year 0 ($)	Year 1 ($)	Year 2 ($)
Project A	-100	90	100
Project B	-100	80	112

i. For what range of discount rates is project A better? Illustrate your answer with an NPV profile. [3 marks]

ii. What is cross-over rate for these two projects? [5 marks]

. a) Consider an annuity of 7 cash flows of $5,000 payable annually. If the interest rate is 10 per cent per annum, what is the value of this annuity today if the first cash flow is to be paid immediately? [6 marks]

b) You are considering the purchase of a home for $500,000. You have available a deposit of $100,000. The bank will lend you money at 8 per cent per annum compounded monthly over a period up to 25 years. If you borrow the required funds over 25 years, what are the monthly repayments? After three years, how much do you still owe the bank? What is the interest component of the 24^th repayment?

[7 marks]

2. a) Perth Entertainment Ltd is expanding rapidly. Its dividend growth rate for the coming year is projected at 20 per cent. This rate will decline by 5 percentage points per year until it reaches the industry average of 5 per cent. Once it reaches 5 per cent, it will stay there indefinitely. The most recent dividend was $0.25 per share, and the market requires a return of 16 per cent on investments such as this one. What is the price per share for Perth Entertainment Ltd?

[12 marks]

3. a) Describe the main methods of project evaluation and explain their advantages and disadvantages. [7 marks]

b) Consider the following cash flows for two mutually exclusive investments:

	Year 0 ($)	Year 1 ($)	Year 2 ($)
Project A	-100	90	100
Project B	-100	80	112

i. For what range of discount rates is project A better? Illustrate your answer with an NPV profile. [3 marks]

ii. What is cross-over rate for these two projects? [5 marks]