FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Market Efficiency
Market efficiency refers to the market's ability to provide investors with all available information about investment options for buying and selling securities. Market efficiency reflects the true value of securities without undervaluing or overvaluing t…
Question
3
Yagajothi is thinking of investing in a rental house. The total cost to purchase the house, including legal fees and taxes, is $220,000. AlIl but $30,000 of this amount will be morigaged. He will pay $1700 per month in morlgage payments. At the end of two years, he will sell the house and at that time expects to clear S50,000 after paying of the remaining mortgage principal (in other words, he wil pay off all his debts for the house and still have $50,000 left). Rents will eam him $1500 per month for the first year and $1800 per month for the second year. The house is in fairy good condition now, so he dossn't expect to have any maintenance costs for the first six months. For the seventh month, Yogajothi ihas budgeted $300. This figure will be increased by S30 per month are O Click the icon to view the table of compound interest factors for discrete compounding periods when i= 0.5%. The present value of buying the house is S. Since the present value is • Yogajothi V buy the house. (Round to the nearest cent as needed.) The following table summarizes cash flows for a project: Year Cash Flow at End of Year $-5,100 1 $3.250 $4,250 3 $- 1,250 a. Choose the appropriate expression you need to solve to find the IRR(s) for this set of cash flows. Do not solve. O A. $-5,100 + $3,250(P/F, i, 1) + $4,250(P/F, i, 2)-S-1,250(P/F, i, 3) = 0 O B. $3,250 + $3,250(P/F, i, 1) + $3,250(P/F, i, 2) - $3,250(P /F, i, 3) = 5 OC. $-5,100 + $3,250(A/P, i, 1) + $4,250(A /P, i, 2) - $- 1,250(A/P, i, 3) = 0 O D. There is no expression that can be used. b. What is the maximum number of solutions for the IRR that could be found in part (a)? The maximum number of solutions for the IRR is. (Round to the nearest whole number as needed.) c. You have found that an IRR of 14.68 percent solves the expression in part (a). Compute the project balances for each year. Year Project Balance $ 1 $ (Type an integer or decimal rounded to two decimal places as needed.) d. Can you tell (without further computations) if there is a unique IRR from this set of cash flows? O A. There are at least seven unique IRRS that can be determined from the current information. O B. There is no possible route forward with this situation. O C. It can be determined with the current information that there is a unique IRR. O D. It is uncertain if there is a unique IRR without further computation.
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Transcribed Image Text:Yagajothi is thinking of investing in a rental house. The total cost to purchase the house, including legal fees and taxes, is $220,000. AlIl but $30,000 of this amount will be morigaged. He will pay $1700 per month in morlgage payments. At the end of two years, he will sell the house and at that time expects to clear S50,000 after paying of the remaining mortgage principal (in other words, he wil pay off all his debts for the house and still have $50,000 left). Rents will eam him $1500 per month for the first year and $1800 per month for the second year. The house is in fairy good condition now, so he dossn't expect to have any maintenance costs for the first six months. For the seventh month, Yogajothi ihas budgeted $300. This figure will be increased by S30 per month are O Click the icon to view the table of compound interest factors for discrete compounding periods when i= 0.5%. The present value of buying the house is S. Since the present value is • Yogajothi V buy the house. (Round to the nearest cent as needed.) The following table summarizes cash flows for a project: Year Cash Flow at End of Year $-5,100 1 $3.250 $4,250 3 $- 1,250 a. Choose the appropriate expression you need to solve to find the IRR(s) for this set of cash flows. Do not solve. O A. $-5,100 + $3,250(P/F, i, 1) + $4,250(P/F, i, 2)-S-1,250(P/F, i, 3) = 0 O B. $3,250 + $3,250(P/F, i, 1) + $3,250(P/F, i, 2) - $3,250(P /F, i, 3) = 5 OC. $-5,100 + $3,250(A/P, i, 1) + $4,250(A /P, i, 2) - $- 1,250(A/P, i, 3) = 0 O D. There is no expression that can be used. b. What is the maximum number of solutions for the IRR that could be found in part (a)? The maximum number of solutions for the IRR is. (Round to the nearest whole number as needed.) c. You have found that an IRR of 14.68 percent solves the expression in part (a). Compute the project balances for each year. Year Project Balance $ 1 $ (Type an integer or decimal rounded to two decimal places as needed.) d. Can you tell (without further computations) if there is a unique IRR from this set of cash flows? O A. There are at least seven unique IRRS that can be determined from the current information. O B. There is no possible route forward with this situation. O C. It can be determined with the current information that there is a unique IRR. O D. It is uncertain if there is a unique IRR without further computation.
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