Question 2

(a) Determine the net present value of a project that contributes $6,000 at the end of the first year, $9,600 at the end of the second year, and $4,800 at the end of the third year. The initial cost is $3,600. The appropriate interest rate is 8% for the first year, 9% for the second year and 10% for the third year.

Show your working clearly. (5 marks)

Provide recommendation/justification on whether this project can be undertaken. (100 to 150 words) (10 marks)

(b) An investment of $2,400 produces a perpetual stream of $120, starting next year. Determine the internal rate of return of this investment.

Show your working clearly. (5 marks)

Interpret your answer. (50 to 100 words) (5 marks)

(c) Consider a project that costs $1,300 immediately. It generates $500 in year 1, $500 in year 2, and $1,600 in year 3. Assume a risk-free rate of 7 per cent, determine the payback period of this project.

Show your working clearly. (2 marks)

Provide discussion for the payback period of this project. (50 to 100 words) (3 marks)