Hw Chapter4 Essay
Compounded monthly, 10% APR compounded annually, and 9% APR compounded daily. Compute the EAR for each investment choice. (Assume that there are 365 days in the year.)
Sol:
1+EAR= (1+r/k)k
So, for 10% APR compounded monthly, the EAR is
1+EAR= (1+0.1/12)12 = 1.10471
=> EAR= 10.47%
For 10% compounded annually, the EAR is
1+EAR= (1+0.1)=1.1
* EAR= 10% (remains the same).
For 9% compounded daily
1+EAR= (1+0.09/365)365 = 1.09416
* EAR= 9.4%
58. You can earn $50 in interest on a $1000 deposit for eight months. If the EAR is the same regardless of the length of the investment, how much interest will you earn on a $1000 deposit for
a. 6 …show more content…
We do not have to pay taxes on this amount of new borrowing, so this is our aftertax benefit of switching cards.
528. Consider a project that requires an initial investment of $100,000 and will produce a single cash flow of $150,000 in five years.
a. What is the NPV of this project if the fiveyear interest rate is 5% (EAR)?
b. What is the NPV of this project if the fiveyear interest rate is 10% (EAR)?
c. What is the highest fiveyear interest rate such that this project is still profitable?
Sol:
a. NPV = –100,000 + 150,000 / 1.055 = $17,529.
b. NPV = –100,000 + 150,000 / 1.105 = –$6862.
Here we need to calculate the IRR.
Therefore,
IRR = (150,000 / 100,000)1/5 – 1 = 8.45%.
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a. If you were certain regarding these future interest rate changes, what twoyear interest rate would be consistent with these expectations?
b. What current…

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