Question
Please ensure your ans is right (IRR) Consider the following two plans for fixed deposit with an initial principal $100,000. Plan A is to deposit
Please ensure your ans is right
(IRR) Consider the following two plans for fixed deposit with an initial principal $100,000. Plan A is to deposit the initial principal today for 1-year at a fixed deposit rate 3.8% per annum; Plan B is to first deposit the initial principal today for 6 months at a fixed deposit rate 3.6% (per annum), and renew the deposit at a fixed deposit rate R (per annum) for the subsequent 6 months. Assume that during the renewal, only the initial principal is deposited for the subsequent 6 months (so you take out the interest for the first 6 months and do not deposit the interest in the renewal). Using IRR analysis, for what range of R, Plan B is better than Plan A? Hint: In the IRR analysis, you may define each 6 months as a period (so 2 periods in total). Write out the cash flows today and the end of each period, and compare the IRR corresponding to a period. If there are multiple solutions to the equation related to IRR calculation, take the positive one.
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