5. The following two alternatives are mutually exclusive. (a) Use rate of return analysis to decide which one will you select if your MARR is 14% per year? (b) Graph interest rate vs. present value for both option 1 and 2. (c) Discuss how your selection between option 1 and 2 will change when MARR is changed and at which interest rate the two options are the same economically. Alternative Life, Annual Benefit Salvage Value Initial Cost years 4. Option 1 Option 2 $42,000 $45,000 $10,000 $11,500 $4,000 $4,200 6.

5. The following two alternatives are mutually exclusive. (a) Use rate of return analysis to decide which one will you select if your MARR is 14% per year? (b) Graph interest rate vs. present value for both option 1 and 2. (c) Discuss how your selection between option 1 and 2 will change when MARR is changed and at which interest rate the two options are the same economically. Alternative Life, Annual Benefit Salvage Value Initial Cost years 4. Option 1 Option 2 $42,000 $45,000 $10,000 $11,500 $4,000 $4,200 6.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Given the financial data for four mutually exclusive alternatives in the table below, determine the best alternative using the incremental rate of return (∆RoR) analysis. MARR =10%.
This section asks you to calculate prices for various options. In all cases, consider a rate r = 7.97% per year. Estimate the volatility of returns using the estimator: 1 n-1 σ²≈ T-t i=0 Si+1 log. Sti 2 The term of each option will be T = 182/360 (half a year). Determine a reasonable strike K, which is at similar levels to the price series you have downloaded. An option is a derivative instrument that gives its holder the right to buy or sell an underlying asset at a pre-agreed price K at a future date T. If this right can only be exercised in time T, we say that the option is of the European type. If it can be exercised at T or at any time prior to T, then we say that the option is American. Likewise, if the option grants the right to buy, we say that the option is Call type, if it grants the right to sell then the option is Puttype. These types of options are the simplest and are known as European vanilla options. In this case, if T is the expiration date of the contract, and St is…
Calculate a one-year holding period return (HPR) for the following two investment alternatives: Which investment would you prefer, assuming they are of equal risk? Explain. The HPR for investment X is %. (Enter as a percentage and round to two decimal places.)
Consider the three calls from the previous problem expiring in T = 1 year. Suppose that the premium of the three options are $7, $3, $1 for A, B, and C, respectively, today (time 0). Suppose the price on the stock today is $14. Suppose the risk-free rate is constant at 5%. Graph the profit function for the butterfly strategy at time T taking into consideration the time value of the initial cost. By how much would the asset have to change over the year for your butterfly portfolio to be a loss?
Jacques just won the lottery and must choose between three award options: 1. A lump sum of $15,000,000 received today 2. 15 end-of-year payments of $1,875,000 3, 40 end-of-year payments of $1,350,000 For each option in the table, indicate which values to enter for each variable in your financial calculator. Option 1 Option 2 Option 3 40 Payments Lump Sum Payment 15 Payments No. of Periods Annual payment Future Value Present Value FV=0 7 Assume the interest rate is 8.00%, entered as 8 on your financial calculator. Note: Take the absolute value of the present value when answering this question. Using the table you just filled out, along with a financial calculator, yields a present value for option 2 of approximately present value for option 3 of approximately if he seeks to maximize present value. $15,000,000 FV-0 7 and a (when the interest rate is 8.00%). Based on this, Jacques should choose option Now assume the interest rate is 9.00%, entered as 9 on your financial calculator.
Am I calculating the Required Return corrrectly using basic algebra? As I see it the investors are requring a return = 10%.
The yield curve indicates that the two-year interest rate will be a function of what variables? Include in your answer an explanation of how changes in these variables will affect the two-year interest rate.
Use the basic equation for the capital asset pricing model (CAPM) to find therequired return for an asset with a beta of 2.20 when the risk-free rate and market return are 8% and12%, respectively.
Future values. Fill in the future values for the following table, using one of the three methods below a. Use the future value formula, FV= PV×(1+n b. Use the TVM keys from a calculator c. Use the TVM function in a spreadsheet, Present Value Interest Rate Number of Periods Future Value 222.00 3% $539 Round to the nearest cent)
1. If you perform a NPV analysis on a perspective investment using a "d" = 15% and: a. the NPV Is < 0, what can you tell me about the investment's IRR (time adjusted rate of return)? b. the NPV is > 0, what can you tell me about the investment's IRR (time adjusted rate of return)? c. the NPV is= 0, what can you tell me about the investment's IRR (time adjusted rate of return)? 2. We presume in Investment analysis that the payback method of evaluation is a better measure of.................than it is a measure of...................... We also think less of the payback method because it sometimes ignores the............., ..................of an investment since the................. the oftentimes occurs after the payback period has lapsed. 3. Please explain why we oftentimes equate EBITDA (earnings before subtracting] interest, taxes, depreciation & amortization) with NOI (net operating income) in examining business' profitability. Why don't…
Capital asset pricing model (CAPM) For the asset shown in the following table, use the capital asset pricing model to find the required return. (Click on the icon here O in order to copy the contents of the data table below into a spreadsheet.) ne Risk-free Market rate, R return, rm Beta, b nts 4% 0.7 1% The required return for the asset is %. (Round to two decimal places.) eТext edia Librai ial Calculat er Resource Enter your answer in the answer box and then click Check Answer. Check Answer mic Study ules Clear All All parts showing 10: DExercise(14); ools > This course (Introduction to Finance (FIN-101-D02) Distance Spring 2021) is hased on Zutter/Smart Princinles of Managerial Finance Rrief Re 4/13 O Type here to search insert
Which is the better option if the interest rate is r=0.07 (r=7%)? Show all work used to arrive at your answer. a. Option I: Receive $510 today at time t=0. b. Option II: Receive $1000 at time t=10. Show work on both options!

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