Question

In: Finance

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

  1. 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 2 months ago
Next > < Previous

Related Solutions

Consider the following two projects A and B. Assume that the appropriate discount rate for each...
Consider the following two projects A and B. Assume that the appropriate discount rate for each project is 20%. Year CF for Project A CF for Project B 0 -$100 - $1,700 1 70 900 2 80 900 3 90 900 If projects A and B are independent projects, which project(s) should you accept based on your best capital budgeting criteria? Please explain your rationale. If projects A and B are mutually exclusive projects, which project(s) should you accept based...
Consider the following two mutually exclusive project. Relevant discount rate for both projects are 12 percent....
Consider the following two mutually exclusive project. Relevant discount rate for both projects are 12 percent. Year CF Project A (Rp) CF Project B (Rp) 0 (2,000,000) (2,300,000) 1 900,000 550,000 2 800,000 650,000 3 950,000 708,000 4 978,000 1,155,000 5 300,000 2,000,000 a. If you apply the discounted payback criterion, which project will you choose? Why? b. If you apply the IRR criterion, which project will you choose? Why? Hint: Range A: 29-31% ; Range B: 24-26% c. If...
Consider the following two projects. The cost of capital for both projects is 15%. Project Year...
Consider the following two projects. The cost of capital for both projects is 15%. Project Year 0 1 2 3 4 5 Alpha -55,000 15,000 14,000 22,000 30,000 35,000 Gamma -80,000 40,000 30,000 25,000 25,000 20,000 Calculate the IRR for each project and determine which one is better. Calculate the NPV for each project and determine which one is better. Based on profitability index method, which project is better? Overall, which project should be accepted assuming they are mutually exclusive?...
Consider the following cash flows of two mutually exclusive projects for AZ-Motorcars. Assume the discount rate...
Consider the following cash flows of two mutually exclusive projects for AZ-Motorcars. Assume the discount rate for AZ-Motorcars is 8 percent. Year 0 AZM mini-suv 480000 AZF full-suv 830000 year1 azm mini-suv 326000 azf full suv 356000 year 2 azm mini-suv 192000 azf full-suv 432000 year 3 azm mini suv 156000 azf full-suv 296000 what is the payback period for each project? what is the NPV for each project? what is the IRR for each project?
Consider the following cash flows of two mutually exclusive projects for AZ-Motorcars. Assume the discount rate...
Consider the following cash flows of two mutually exclusive projects for AZ-Motorcars. Assume the discount rate for both projects is 8 percent.    Year AZM Mini-SUV AZF Full-SUV 0 –$ 530,000 –$ 880,000 1 336,000 366,000 2 212,000 452,000 3 166,000 306,000    a. What is the payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)    Payback period   AZM Mini-SUV years   AZF Full-SUV years     b. What is...
Consider the following cash flows of two mutually exclusive projects for AZ-Motorcars. Assume the discount rate...
Consider the following cash flows of two mutually exclusive projects for AZ-Motorcars. Assume the discount rate for both projects is 11 percent.    Year AZM Mini-SUV AZF Full-SUV 0 –$ 520,000 –$ 870,000 1 334,000 364,000 2 208,000 448,000 3 164,000 304,000    a. What is the payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)     b. What is the NPV for each project? (Do not round intermediate...
Consider the following cash flows of two mutually exclusive projects for AZ-Motorcars. Assume the discount rate...
Consider the following cash flows of two mutually exclusive projects for AZ-Motorcars. Assume the discount rate for both projects is 9 percent.    Year AZM Mini-SUV AZF Full-SUV 0 –$ 485,000 –$ 835,000 1 327,000 357,000 2 194,000 434,000 3 157,000 297,000    a. What is the payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)     b. What is the NPV for each project? (Do not round intermediate...
Consider the following cash flows on two mutually exclusive projects for A- Z motorcars.Assuming both projects...
Consider the following cash flows on two mutually exclusive projects for A- Z motorcars.Assuming both projects require an annual return of 11 percent. year AZM Mini-Suv AFL Full-Suv 0 - 470000 - 820000 1 324000 354000 2 188000 428000 3 154000 294000 A    What is the pay back period for each projects B What is the NPV for each project C What is the IRR for each project Please note Do not do intermediate and run your answers to...
Two projects A and B with the following cash flows with a fix interest rate of...
Two projects A and B with the following cash flows with a fix interest rate of 12%. A. Use the present worth to select which project is better? Table 1 Project A 0 1 2 3 -9000 3000 3000 6000 Table 2 Project B 0 1 2 3 -12000 4000 3000 8000 B. Repeat the question in part A using AW analysis C. Repeat the question in part A using FW analysis
1. If the interest rate is 4%, what are the proceeds of a $5,000 investment after...
1. If the interest rate is 4%, what are the proceeds of a $5,000 investment after 10 years? ?a) assuming simple interest ?b) assuming compound interest 2. What if interest in #1 is compounded semi-annually?  What if monthly? 3. How much do you need to deposit into a bank in order to receive proceeds of $200,000 in 5 years if the interest rate is 2.5% What if interest is compounded quarterly? 4. What is the present value of $200,000 to be...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT