EBK CONTEMPORARY ENGINEERING ECONOMICS
6th Edition
ISBN: 8220101336736
Author: Park
Publisher: PEARSON
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Chapter 13, Problem 5P
To determine
Calculate the call option price.
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Consider six mutually exclusive and indivisible investment alternatives under evaluation by TranSystems in their bridge and structure design group. At any time TranSystems chooses to exit the investment, their initial financial outlay will be refunded, in addition to the annual returns earned. Based on the data shown below and a MARR of 10 percent, determine the preferred alternative. (Note: There is no planning horizon specified, so pick any number of years you like—the optimum portfolio and the IRR will remain the same, since the ‘‘initial investment’’ and the ‘‘salvage value’’ are the same, and the annual returns are constant each year. The PW will differ depending upon number of years selected, and yet will be a consistent measure.)
Alternative 1 2 3 4 5 6
Initial Investment $25,000 $35,000 $30,000 $40,000 $60,000 $50,000
Annual Return $2,600 $3,750 $3,050 $4,775 $6,750 $5,850
a. Which alternative should TranSystems select? Use the IRR method to determine the preferred alternative.…
Which of the following statements is incorrect?(a) Holding on to cash is the most risk-free investment option.(b) To maximize your return on total assets (ignoring financial risk), you mustput all your money into the same type of investment category.(c) Diversification among well-chosen investments can reduce market volatility.(d) Broader diversification among well-chosen assets always leads to a higherreturn without increasing additional risk.
Stock ABC has a Forward for December at: $450,
Is it reasonable that A PUT option on ABC, with a strike of $500, costs $45?
A.
No because the minimum intrinsic is $50.
B.
No, because $35 feels low for a stock with such a high price per share.
C.
Yes because Intrinsic is $40, Extrinsic is $5
D.
Yes because it depends on the distribution; that is defined by the volatility and time to maturity
Chapter 13 Solutions
EBK CONTEMPORARY ENGINEERING ECONOMICS
Ch. 13 - Prob. 1PCh. 13 - Prob. 2PCh. 13 - Prob. 3PCh. 13 - Prob. 4PCh. 13 - Prob. 5PCh. 13 - Prob. 6PCh. 13 - Prob. 7PCh. 13 - Prob. 8PCh. 13 - Prob. 9PCh. 13 - Prob. 10P
Ch. 13 - Prob. 11PCh. 13 - Prob. 12PCh. 13 - Prob. 13PCh. 13 - Prob. 14PCh. 13 - Prob. 15PCh. 13 - Prob. 16PCh. 13 - Prob. 17PCh. 13 - Prob. 18PCh. 13 - Prob. 19PCh. 13 - Prob. 20PCh. 13 - Prob. 21PCh. 13 - Prob. 22PCh. 13 - Prob. 23PCh. 13 - Prob. 24PCh. 13 - Prob. 25PCh. 13 - Prob. 1STCh. 13 - Prob. 2STCh. 13 - Prob. 3STCh. 13 - Prob. 4ST
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