SHOW ALL WORK

INCLUDE CASH FLOW DIAGRAMS AS APPROPRIATE

PROVIDE ALL SPREADSHEETS USED

1. The following are the net cash flows for a project under consideration:

F0 = -600

F1 = 3200

F2 = -2000

F3 = -6400

F4 = 6400

a) Plot PW(i) starting at an interest rate of 0% and ending at 350%.

b) Find all non-negative rates of return for this project

c) Compute the modified rate of return (the solution to FW(i;k) = 0) for external rates k = 10% and 50%.

2. There is a bond with a $10,000 par value that matures in 7 years with a coupon rate of 5% paid annually.

a) How much should you pay for this bond for a yield to maturity rate of 9%?

b) If you bought the bond for $6,000 what is the current yield and yield to maturity?

3. You have a 10 year loan for $20,000 and you make annual payments. The interest rate is 5% annual compounded quarterly.

a) What are your annual payments?

b) If the inflation rate is 3% annual compounded monthly, what is the purchasing power of your final payment in year 0 dollars?

c) What are the equal annual payments in year 0 constant dollars with the above inflation rate?

d) What is the total interest paid in year 0 constant dollars with the above inflation rate?

4. You are looking to purchase a new vehicle for $25,789. This vehicle gets 22 mpg and you average driving 14,000 miles per year. You expect that gasoline will average $2.10 per gallon for the first year and will increase 15% per year but it will never get above $5 per gallon because of government controls. Maintenance is included for the first two years but after that you think that maintenance will cost $1,000 and increase by 10% per year after that. The vehicle will lose 30% of its value the first year but the salvage value will only decrease by 10% per year after that. For an interest rate of 5%, what is the economic life of the vehicle?