INSTRUCTIONS:This question contains two (2) parts. Respond to both parts. In your answer, use bold text to label your response to each part (e.g.Part a):Your response...)

Part a):Now that they have accumulated a deposit of 50,000, Jack and Jill intend to use the deposit to take out a housing loan to purchase a home. The house costs $490,000. The loan is to be repaid in equal monthly instalments (end of month) over a term of 25 years. The interest rate quoted by the Bank isj₁₂= 4.8%pa.

1. Calculate the effective annual rate on the loan.
2. How much is the monthly repayment?
3. How much interest is in the 90^threpayment?
4. How much would they still owe immediately before the 180^threpayment?

(5 marks)

Part b):Polycorp is investigating two projects. The risk-free rate is 5% pa and the market return is 12%pa. Project A has a beta of .7 and Project B has beta of 1.5. The projects are independent. If accepted the projects will initially be funded by borrowing at 7%pa. The relevant net cash flows for each project are below. The firm's current weighted average cost of capital is 11% pa (before taking either or both A and B). Assume no taxes. Calculate the NPV of each project and indicate which project or projects should be accepted/rejected. Explain your choice of the discount rate and your adjustment for risk.

Year012A(10000)54007500B(15000)86009400