Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 8, Problem 33QAP
Summary Introduction
To compute: Present value of the commitment.
Introduction: Investors invest in bonds to ensure regular income (interest income) on their investments. Bondholders are the investors who are risk averse.
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Uncle Ben saved $800.000 during the 25 years that he worked for a major corporation. Now he has retired at the age of 50 and has begun to draw a comfortable pension check every month. He wants to ensure the financial security of his retirement by investing his savings wisely and is currently considering two investment opportunities. Both investments require an initial payment of $600.000. The following table presents the estimated cash inflows for the two alternatives.
Year 1
Year 2
Year 3
Year 4
Opportunity # 1
$178,000
$188,000
$252,000
$324,000
Opportunity # 2
328,000
348,000
56,000
48,000
Uncle Ben decides to use his past average return on mutual fund investments as the discount rate; it is 8 percent.
Answer this question:
Compute for the Net Present Value of opportunity #1.
Compute for the Profitability Index of opportunity #1
Compute for the Net Present Value of opportunity #2
Compute for the Profitability Index of opportunity…
Chelsea invested the profit of his business in
an investment fund that was earning 2.50%
compounded monthly. In 4 years, he began
withdrawing $3,000 from this fund at the end
of every 6 months. If the money in the fund
lasted for the next 6 years, how much money
did he initially invest in the fund?
Please include a well-labelled timeline
diagram. Full solutions should be shown on
separate sheets of paper. Submit your
solutions.
$
Round to the nearest cent
Uncle Ben saved $800,000 during the 25 years that he worked for a
major corporation. Now he has retired at the age of 50 and has begun
to draw a comfortable pension check every month. He wants to ensure
the financial security of his retirement by investing his savings wisely
and is currently considering two investment opportunities. Both
investments require an initial payment of $600,000. The following
table presents the estimated cash inflows for the two alternatives.
Year 1 Year 2 Year 3 Year 4
Opportunity # 1 $178,000 $188,000 $252,000 $324,000
Opportunity # 2 328,000 348,000 56,000 48,000
Uncle Ben decides to use his past average return on mutual fund
investments as the discount rate; it is 8 percent.
Answer the questions:
1. Compute for the Accounting Rate of Return of opportunity #1.
2. Compute for the Accounting Rate of Return of opportunity #2.
3. Compute for the Internal Rate of Return of opportunity #1.
4. Compute for the Internal Rate of Return of opportunity #2.
Chapter 8 Solutions
Corporate Finance
Ch. 8 - Prob. 1CQCh. 8 - Prob. 2CQCh. 8 - Prob. 3CQCh. 8 - Yield to Maturity Treasury bid and ask quotes are...Ch. 8 - Coupon Rate How does a bond issuer decide on the...Ch. 8 - Real and Nominal Returns Are there any...Ch. 8 - Prob. 7CQCh. 8 - Prob. 8CQCh. 8 - Term Structure What is the difference between the...Ch. 8 - Crossover Bonds Looking back at the crossover...
Ch. 8 - Municipal Bonds Why is it that municipal bonds are...Ch. 8 - Prob. 12CQCh. 8 - Treasury Market Take a look back at Figure 8.4....Ch. 8 - Prob. 14CQCh. 8 - Bonds as Equity The 100-year bonds we discussed in...Ch. 8 - Bond Prices versus Yields a. What is the...Ch. 8 - Interest Rate Risk All else being the same, which...Ch. 8 - Prob. 1QAPCh. 8 - Prob. 2QAPCh. 8 - Prob. 3QAPCh. 8 - Prob. 4QAPCh. 8 - Prob. 5QAPCh. 8 - Prob. 6QAPCh. 8 - Prob. 7QAPCh. 8 - Prob. 8QAPCh. 8 - Prob. 9QAPCh. 8 - Prob. 10QAPCh. 8 - Prob. 11QAPCh. 8 - Prob. 12QAPCh. 8 - Prob. 13QAPCh. 8 - Prob. 14QAPCh. 8 - Prob. 15QAPCh. 8 - Prob. 16QAPCh. 8 - Prob. 17QAPCh. 8 - Prob. 18QAPCh. 8 - Prob. 19QAPCh. 8 - Prob. 20QAPCh. 8 - Prob. 21QAPCh. 8 - Prob. 22QAPCh. 8 - Prob. 23QAPCh. 8 - Prob. 24QAPCh. 8 - Prob. 25QAPCh. 8 - Prob. 26QAPCh. 8 - Prob. 27QAPCh. 8 - Prob. 28QAPCh. 8 - Prob. 29QAPCh. 8 - Prob. 30QAPCh. 8 - Prob. 31QAPCh. 8 - Prob. 32QAPCh. 8 - Prob. 33QAPCh. 8 - Prob. 34QAPCh. 8 - Prob. 35QAPCh. 8 - Prob. 1MCCh. 8 - Prob. 3MCCh. 8 - Prob. 5MCCh. 8 - Prob. 6MCCh. 8 - Prob. 7MC
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