Let's examine your ability to calculate NPV. Let's assume a piece of equipment has an implied discount rate of 8% and an initial cost of $1,000,000. The piece of equipment is expected to generate positive cash flows in years 1-3 of $150,000 and years 4-6 of $200,000 and $300,000 in year 7. Let's also assume that you have to spend $150,000 in year 4 in order to maintain this piece of equipment. What is the project's NPV? (ignoring income taxes). (Be sure to show your work!) (This question is worth 3 points and an incorrect response or unanswered initial response will result in 0 points assigned)

A borrower is offered a 30 year, fully amortizing ARM with an initial rate of 3.35%. After the first year, the interest rate will adjust each year, using 1 yr LIBOR as the index, plus a margin of 175bp. The price of the property is $8,000,000 and the loan will have an initial LTV ratio of 75% At the first reset date, 1 year LIBOR is at 3%. What is the borrower s payment during the 2nd year of the loan?

Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment. Project H represents an investment in a hydraulic lift. Keller wishes to use a net present value profile in comparing the projects. The investment and cash flow patterns are as follows: Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

a. Determine the net present value of the projects based on a zero percent discount rate.

b. Determine the net present value of the projects based on a discount rate of 11 percent. (Do not round intermediate calculations and round your answers to 2 decimal places.)

c. If the projects are not mutually exclusive, which project(s) would you accept if the discount rate is 11 percent?

• Project E

• Project H

• Both H and E

A one-year, $100,000 loan carries a coupon rate and a market interest rate of 12 percent. The loan requires payment of accrued interest and one-half of the principal at the end of six months. The remaining principal and accrued interest are due at the end of the year.

A. what will be the cash flows at the end of six months and at the end of the year?

B. What is the present value of each cash flow discounted at the market rate? what is the total present value?

C. What proportion of the total present value of cash flows occurs at the end of six months? what proportion occurs at the end of the year?

D. What is the duration of this loan?

1. You started your investment with an opening deposit of $1,000.  Your portfolio grew as follows:
   

1. What was your average return?  (Arithmetic average)
2. What was your actual return? (Geometric average)
3. Use the TVOM to calculate the Rate (R) using the End year 5 as your Future Value.  

PLEASE SHOW HOW THIS IS DONE IN EXCEL

5.23

Find the amount to which $400 will grow under each of these conditions:

1. 12% compounded annually for 8 years. Do not round intermediate calculations. Round your answer to the nearest cent.

   $  

2. 12% compounded semiannually for 8 years. Do not round intermediate calculations. Round your answer to the nearest cent.

   $  

3. 12% compounded quarterly for 8 years. Do not round intermediate calculations. Round your answer to the nearest cent.

   $  

4. 12% compounded monthly for 8 years. Do not round intermediate calculations. Round your answer to the nearest cent.

   $  

5. 12% compounded daily for 8 years. Assume 365-days in a year. Do not round intermediate calculations. Round your answer to the nearest cent.

   $  

6. Why does the observed pattern of FVs occur?
   -Select-The future values increase because as compounding periods per year increase, interest is earned on interest less frequently.The future values decrease because as compounding periods per year increase, interest is earned on interest more frequently.The future values increase because as compounding periods per year increase, interest is earned on interest more frequently.The future values increase because as compounding periods per year decrease, interest is earned on interest more frequently.The future values decrease because as compounding periods per year decrease, interest is earned on interest more frequently.Item 6

summary of the company’s total revenue and expenses at the end of five selected months is as follows.

1. Rank the company’s fiscal quarters from most profitable to least profitable.

2. Compute the company’s income for the month of September.

3. Compute the company’s net income (or loss) for the first two months of the third quarter. Provide a possible explanation why profitability for the first two months of the third quarter differs significantly from profitability achieved in the third month of the quarter (as computed in part b).

5.27

M3_IND5. An investor wishes to invest all of her $13.5 million in a diversified portfolio through a
commercial lender. The types of investments, the expected annual interest rate for the investment, and
the maximum allowed percentage of the total portfolio that the investment can represent are shown in
the table below:

INVESTMENT EXPECTED INTEREST MAXIMUM ALLOWED
(% of total portfolio)
Low-income mortgage loans 7.20% 15%
Conventional mortgage loans 6.00% 30%
Government sponsored
mortgage loans
8.00% 20%
Bond investments 5.45% 15%
Stock investments 8.90% 20%
Futures trading 9.80% 15%

She wants at least 30% of her total investment in non-mortgage instruments. Furthermore, she wants
no more than 45% of her total investment to be in high-yield and high risk instruments (i.e. expected
interest rate of investment is 8% or greater). Formulate and solve this problem in Excel to determine
how her money should be diversified in a manner which will meet the requirements and maximize the
amount of interest income. (Hint: Make sure that the LHS and RHS of constraints are the same units)

a) What is the expected total interest income generated from the investment strategy (the value of
the objective function)?
b) Based on your solution, how much should be invested in government sponsored mortgage
loans?
c) Based on your solution, how much should be invested in stock investments?
d) If you could increase the maximum allowed for the investments (in order to increase overall
return) - which would you choose: conventional mortgage loans, bond investments, or
governmental sponsored mortgage loans.
e) If the return on low-income mortgage loans was reduced to 5%, how much should be invested
in these low-income mortgage loans based on your new solution?

5.22

Jan sold her house on December 31 and took a $25,000 mortgage as part of the payment. The 10-year mortgage has an 8% nominal interest rate, but it calls for semiannual payments beginning next June 30. Next year Jan must report on Schedule B of her IRS Form 1040 the amount of interest that was included in the two payments she received during the year.

a. What is the dollar amount of each payment Jan receives? Round your answer to the nearest cent.

$  

b. How much interest was included in the first payment? Round your answer to the nearest cent.

$  

How much repayment of principal was included? Do not round intermediate calculations. Round your answer to the nearest cent.

$  

How do these values change for the second payment?

1. The portion of the payment that is applied to interest declines, while the portion of the payment that is applied to principal increases.
2. The portion of the payment that is applied to interest increases, while the portion of the payment that is applied to principal decreases.
3. The portion of the payment that is applied to interest and the portion of the payment that is applied to principal remains the same throughout the life of the loan.
4. The portion of the payment that is applied to interest declines, while the portion of the payment that is applied to principal also declines.
5. The portion of the payment that is applied to interest increases, while the portion of the payment that is applied to principal also increases.

-Select-IIIIIIIVVItem 4

c. How much interest must Jan report on Schedule B for the first year? Do not round intermediate calculations. Round your answer to the nearest cent.

$  

Will her interest income be the same next year?
-Select-Her interest income will increase in each successive year.Her interest income will remain the same in each successive year.She will not receive interest income, only a return of capital.Her interest income will decline in each successive year.She will receive interest only when the mortgage is paid off in 10 years.Item 6

d. If the payments are constant, why does the amount of interest income change over time?

1. As the loan is amortized (paid off), the beginning balance, hence the interest charge, increases and the repayment of principal increases.
2. As the loan is amortized (paid off), the beginning balance, hence the interest charge, declines and the repayment of principal increases.
3. As the loan is amortized (paid off), the beginning balance, hence the interest charge, declines and the repayment of principal declines.
4. As the loan is amortized (paid off), the beginning balance, hence the interest charge, increases and the repayment of principal declines.
5. As the loan is amortized (paid off), the beginning balance declines, but the interest charge and the repayment of principal remain the same.

-Select-IIIIIIIVV

5.21 Kristina just won the lottery, and she must choose among three award options. She can elect to receive a lump sum today of $61 million, to receive 10 end-of-year payments of $9.3 million, or to receive 30 end-of-year payments of $5.4 million.

1. If she thinks she can earn 7% percent annually, which should she choose?
   -Select-She should accept the 30-year payment option as it carries the highest present value.She should accept the lump-sum payment option as it carries the highest present value.She should accept the 10-year payment option as it carries the highest present value.She should accept the lump-sum payment option as it carries the highest future value.Item 1

2. If she expects to earn 8% annually, which is the best choice?
   -Select-She should accept the lump-sum payment option as it carries the highest present value.She should accept the 30-year payment option as it carries the highest present value.She should accept the 10-year payment option as it carries the highest present value.She should accept the lump-sum payment option as it carries the highest future value.Item 2

3. If she expects to earn 9% annually, which option would you recommend?
   -Select-She should accept the lump-sum payment option as it carries the highest present value.She should accept the 30-year payment option as it carries the highest present value.She should accept the 10-year payment option as it carries the highest present value.She should accept the 30-year payment option as it carries the highest future value.Item 3

4. Explain how interest rates influence her choice.
   -Select-The higher the interest rate, the more valuable it is to get money rapidly.The lower the interest rate, the more valuable it is to get money rapidly.The higher the discount rate, the higher the more distant cash flows are valued.Interest rates do not influence the optimal choice in any way.Interest rates and the present value of cash flows are positively related.

You have just purchased a new warehouse. To finance the purchase, you’ve arranged for a 35-year mortgage for 85percent of the $4,400,000 purchase price. The monthly payment on this loan will be $18,500.

what is the apr on this loan?

what is the ear on this loan?

3. Make a list of the advantages and the disadvantages of buying an existing business

5.23

5.21 Kristina just won the lottery, and she must choose among three award options. She can elect to receive a lump sum today of $61 million, to receive 10 end-of-year payments of $9.3 million, or to receive 30 end-of-year payments of $5.4 million.

1. If she thinks she can earn 7% percent annually, which should she choose?
   -Select-She should accept the 30-year payment option as it carries the highest present value.She should accept the lump-sum payment option as it carries the highest present value.She should accept the 10-year payment option as it carries the highest present value.She should accept the lump-sum payment option as it carries the highest future value.Item 1

2. If she expects to earn 8% annually, which is the best choice?
   -Select-She should accept the lump-sum payment option as it carries the highest present value.She should accept the 30-year payment option as it carries the highest present value.She should accept the 10-year payment option as it carries the highest present value.She should accept the lump-sum payment option as it carries the highest future value.Item 2

3. If she expects to earn 9% annually, which option would you recommend?
   -Select-She should accept the lump-sum payment option as it carries the highest present value.She should accept the 30-year payment option as it carries the highest present value.She should accept the 10-year payment option as it carries the highest present value.She should accept the 30-year payment option as it carries the highest future value.Item 3

4. Explain how interest rates influence her choice.
   -Select-The higher the interest rate, the more valuable it is to get money rapidly.The lower the interest rate, the more valuable it is to get money rapidly.The higher the discount rate, the higher the more distant cash flows are valued.Interest rates do not influence the optimal choice in any way.Interest rates and the present value of cash flows are positively related.