Reference no: EM132534896
Questions -
a. Kristi is considering an investment that will pay $7,500 a year for eight years, starting one year from today. How much should she pay for this investment if she wishes to earn a 6% rate of return? Provide complete calculations in your answer.
b. Kristi was offered three (3) different assets, as listed below:
Asset 1 pays annual interest rate of 9% compounding annually.
Asset 2 pays annual interest rate of 8.9% compounding semi-annually.
Asset 3 pays interest rate 8.95 compounding monthly.
Based on effective annual interest rate calculations, which of the above assets is the best choice for Kristi. Show your calculations for all three (3) assets.
c. Delta Limited has two possible investment alternatives and seeks your help to select the best option for them to choose. The table below gives you the initial investment and the expected future cash- flows over a 4 year period. The required rate of return is 12%.
|
Year
|
Project A
|
Project B
|
|
0
|
-95,200
|
-162,000
|
|
1
|
47,800
|
68,000
|
|
2
|
37,200
|
65,600
|
|
3
|
41,400
|
61,000
|
|
4
|
29,200
|
54,600
|
a. Calculate the profitability index for each project.
b. Calculate the the Net Present Value (NPV) for each project
c. Which project should be selected based on your calculations? Explain your answer. (30 - 40 words).