You have developed the technology to use gold to produce high-capacity fiber optic switches.

The technology has cost $ 5 million to develop. You need $50 million of initial capital

investment to start production. Sales of the Switch sales will be $20 million per year for

the next 5 years and then drop to zero. The main cost of production is gold. Each year,

you need 20,000 ounces of gold. Gold is currently selling for $250 per ounce. Your supplier

thinks that the gold price will be appreciated at 5% per year for the next 5 years. The cost of

capital is 10% for the fiber-optics business. The tax rate is 35%. The capital investment can

be depreciated linearly over the next 5 years.

a. Calculate the after-tax cash flows of the project.

b. Should you take the project?

Question:

a) Ms. Shokha wants to make an investment today that will have a future value of $500 one year from today. If she has a choice of a 5% discount rate or a 6% discount rate, which investment should she choose?

b) Calculate the average annual return for a $3,000 investment with an ending price of $5,500 four years later, with no intermediate cash flows.

c) Consider an investment with the following cash flows:

Year

Cash flows

2003

$20,000

2004

$40,000

2005

$25,000

2006

$35.000

What are the most the investor would invest so that the return on the investment is at least 10%?

d) Suppose the expected risk-free asset is 6% and the return on the market is 10%. Further, suppose you have a portfolio comprised of the following securities with equal investments in each:

(i) What is the expected return for each security in the portfolio?

(ii) What is the expected return on the portfolio?