Engenering economic problems Custom Essay

Question 2. Consider project A and Project B and a discount rate of 12% to decide which project has a higher NPV
Project A Project B
1 2000 5000
2 2440 5000
3 2976.8 5000
4 3631.696 5000
5 4430.669 5000

Question 3. You intend to hold a stock for 25 years
a. If a firm intends to offer 15 Euros annual dividend after the 10th year how much would you offer for its stock today given an interest rate of 8%?
b. If moreover the dividends are expected to grow at 3% annually how much would you now offer? Is the stock worth more or less when the dividends are expected to grow? Do those results make sense?

Question 4. What is sensitivity analysis and what is scenario analysis. Critically discuss their utilization and provide relevant examples.

Question 5. Discuss the differences in the use between the effective annual rate (EAR) and the annual percentage rate (APR).

Question 6. Consider the following four securities
– Security Amount Invested Expected Return
– DCLK 10000 4.03
– KO 12000 0.84
– INTC 9000 1.05
– KEI 9000 0.59
Discus the expected value and the standard deviation of your portfolio of stocks.

Question 7.

a. Suppose you borrow $10,000. You are going to repay the loan by making equal annual payments for five years. The interest rate on the loan is 14% per year. Prepare an amortization schedule for the loan.

How much interest will you pay over the life of the loan?
b. If on the same loan, you were told that the compounding is done on a monthly basis, what are your monthly payments going to be?

Question 8. The going rate on student loans is quoted as 9% APR. The terms of the loan call for monthly payments. What is the Effective Annual Rate, or EAR, on such a student loan?

Question 9. You are the financial manager of a software development company. Managers from two product divisions have presented you with two potential projects. One project refers to the development of

a new TFT screen, whereas the other project refers to the development of a new laser printer

Time (Years) TFT Screen Laser Printer
0 -4000 -8000
1 600 1250
2 1500 3000
3 2000 4000
4 2750 5000

Based on the above data, and an interest rate of r=0.05
a. Decide which project to accept based on the Net Present Value model (NPV)
b. Decide which project to accept based on the Payback Criterion Rule
c. Provide your final decision with respect to which project to choose based on your results in parts a) and b).

Question 10. Critically discuss the advantages and disadvantages of all the methods we have discussed (Payback, NPV, IRR) that can help us evaluate the profitability of a project. Your discussion should

reflect on the choice of the MIRR as well.

Question 11. What is the expected return and the variance of the following portfolio if you are invested 30% in A, 30% in B and 40% in C?

Rate of Return if State Occurs
State of Economy Probability for the State of Economy A B C
Boom 0.4 0.30 -0.05 12.5
Bust 0.5 -0.1 0.25 7.5

Question 12. Respond to the following comment: “It’s all very well telling companies to maximize net present value, but ‘net present value’ is just an abstract notion. What I tell my managers is that profits are

what matters and It’s profits that we’re going to maximize.”

Question 13. What is the net present value rule? What is the rate of return rule? Do the two rules give the same answer?

Question 14. A common stock will pay a cash dividend of $4 next year. After that, the dividends are expected to increase indefinitely at 4 percent per year. If the discount rate is 14 percent, what is the PV of

the stream of dividend payment given that you intend to hold the stock for 25 years?

Question 15. Bee Ware Company is presented with the following two mutually exclusive projects. The required return for both projects is 15%. The IRR for each Project are given on the table.
Year Project M Project N
0 -190,000 -300,000
1 75,000 110,000
2 90,000 145,000
3 85,000 130,000
4 70,000 95,000

IRR 24.93821794% 22.37628636%

a. What is the NPV for each project? Which project would you decide to undertake according to the NPV criterion?
b. What is the relationship between IRR and NPV? Are there any situations in which you might prefer one method over the other?
What project would you undertake according to the IRR criterion?

Question 16. 5000 is invested for three years at 8% per year compounded semi-annually.
a) Calculate the total value of the investment (6326.59)
b) Compare the return on the investment when interest rate is compounded annually to that when compounded semi-annualy (6351)
c) Calculate the total value of the investment when compounded monthly and daily. (Assume 12/365) (6356)

Question 17. Find the compound interest rate required for 10.000 to grow to 20.000 in 6 years. (12.24%)

Question 18. A bank pays 7.5% interest rate compounded annually. How long will it take for 10000 to grow to 20000. (9.5844)

Question 19. Calculate the present value of 10000 due in five years if interest is compounded annually at 4.5% (8024.51)

Question 20. How long should it take for an investment to double in value when interest is compounded annually at 6% (11.89)

Question 21. Suppose that 2500 is invested for eight years and grows to 4525. Calculate the interest rate received by the investment (7.6985%)

Question 22. What is the present value of a 10-year annual payment of 1000 euros (use 5% discount rate). Find the answer using two methods. (7721.735)

Question 23. Repeat exercise 7 considering that the annual payments are due as follows: 3000 end of year 3, 4000 end of year 6, 3000 end of year 10.

Question 24. Repeat exercise 7 using future values

Question 25. Explain how an increase in the price level affects the real value of money?

Question 26. Describe in detail the costs of inflation? Come up with examples where necessary.

Question 27. How does inflation affects savings?

Question 28. If inflation is less than expected inflation who benefits? Debtors or Creditors? Come up with an example to explain your answer.

Question 29. If inflation is more than expected inflation who benefits? Debtors or Creditors? Come up with an example to explain your answer.

Question 30. You are given the following information for the cost of products from 2004 to 2006. Assume that the CPI basket is {10# beef, 20# chicken}. In 2004-5 households bought CPI basket but in

2006 households bought {5 lbs beef, 25 lbs chicken}.

beef chicken
2004 $4 $4
2005 $5 $5
2006 $9 $6
a. Compute the cost of the CPI basket for each year (use the original basket of goods)
b. Use 2004 as your base year and compute the CPI index.
c. Compute the Inflation
d. Compute the cost of the of the 2006 household basket and the revised CPI index as well as the revised inflation rate. What can you conclude about the validity of the reported inflation rate when the actual

basket of goods that households purchase has changed but the CPI basket does not adjust for it?

Question 31. In each scenario, determine the effects on the CPI and the GDP deflator.
a. Starbucks raises the price of Frappuccinos.
The CPI and GDP deflator both rise.
b. A local manufacturer raises the price on industrial tractors it produces.
The GDP deflator rises, the CPI does not.
c. Armani raises the price of the Italian jeans it sells in the Hong Kong.
The CPI rises, the GDP deflator does not.

Question 32. Which of the following is a better measure of the average of the prices of all goods and services included in GDP? Discuss
a. The Consumer Price Index.
b. The Producer Price Index.
c. The GDP deflator.
d. The inflation rate.

Question 33. Which market basket below specifically targets intermediate goods?
a. The basket used by the Consumer Price Index. Discuss.
b. The basket used by the GDP deflator.
c. The basket used by the Producer Price Index.
d. All of the above.

Question 34. If the inflation rate turns out to be higher than expected, then:
a. Borrowers pay lenders a higher real interest rate than they expected.
b. Borrowers pay lenders a lower real interest rate than they expected.
c. Borrowers pay only a nominal interest rate but not a real interest rate.
d. Borrowers pay only a real interest rate but not a nominal interest rate.

Discuss using an example.
Answer B.

Question 35. What is the difference between the CPI and the GDP deflator?

Question 36 Suppose that people consume only three goods as shown in the following table?
Tennis Balls Golf Balls Bottles of Gatorade
Price Quantity Price Quantity Price Quantity
2011 2 100 4 100 1 200
2012 2 100 6 100 2 200

a. What is the percentage change in the price of each one of the three goods?
b. Find the Cost of Goods for each year and index it to 100 for the year 2011.
c. Compute the percentage change in the overall price level. What do we call this measure?
d. Next index 100 for the year 2012 and compute the percentage change in the overall price level.
e. Does the choice of index affect the estimated rate of inflation?

Question 37 Work through the exercises we covered in class with respect to inflation. Make sure that you can work through an income statement and a cash flow statement