3. A firm has the
choice of the following investments:
A: costs $5000 today, pays a total of
$4000 next year and $1700 the second year.
No value beyond that.
B: costs $10000 today, pays $2000 next
year and $9800 the second year. No value
a) Show any
calculations used to determine whether the firm will invest in either, neither,
or both of these projects if the interest rate is 10%. (1 point)
b) Repeat part (a) with an interest rate is
5%. (1 point)
c) Someone claims that the rate of return of
project B is 9%. Explain whether or not
you can refute this claim base only on the data from parts (a) and (b). Then set up (but do not solve) and equation
that would give us an exact answer for the rate of return of the project. (1 point)