Consider the following two projects both costing $5,000. Assume the prevailing interest rate is 4%. ...

Consider the following two projects both costing $5,000. Assume the prevailing interest rate is 4%.
Project 1 pays $1,000 for 50 years.
Project 2 pays $900 forever.
1. Use Solver to find the interest rate at which an investor would be indifferent between the two projects. Please use an Excel spreadsheet and save the Solver solution. That way, the grader can open the Solver window and check the parameter values you entered into Solver.
  
  (Hint: One way to ensure that the value of the two projects is identical is to create a cell in Excel that is equal to the difference in values of the two projects. Then, choose the option in Solver to set that cell equal to zero. Equivalently, you can add a constraint to Solver that the values of the two projects are equal.)

Solutions

Expert Solution

The rate will be 5%

Rate	5%
PV of cash flows- Project 1	$19,096.67
PV of cash flows- Project 2	19096.6538
Difference	$0.01

jeff jeffy answered 1 week ago

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