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Engineering

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New England College

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1
Problem Set 2/Exam 2
Student’s Name
Institutional Affiliation
Course
Professor’s Name
Date

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Problem Set 2/Exam 2
1.0

  
Where NPV=Net Present Value
= Net cash flow at time t
I= discount rate
t = time of the cash flow
NPV=


=


+


+


+


+


- 100000
= 37037 + 2469.14 + 6096.63 + 2408.55 + 2453.14 - 100000
= $ - 82868.84
Therefore, the project should be rejected due to the loss incurred (Gallo, 2014).
2.0
When interest rates decline, bond prices rise, conversely when interest rates rise, bond
prices fall. Bonds compete on the interest they provide to investors. When interest rates rise
new bonds being issued, have higher interest rates hence give more income to investors,

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1 Problem Set 2/Exam 2 Student’s Name Institutional Affiliation Course Professor’s Name Date 2 Problem Set 2/Exam 2 1.0 𝑁𝑃𝑉 = 𝑅𝑡 (1 + 𝑖)𝑡 Where NPV=Net Present Value 𝑅𝑡 = Net cash flow at time t I= discount rate t = time of the cash flow 𝑅 𝑡 NPV=∑𝑛𝑡=0 (1+𝑖) 𝑡 5000 = (1+0.35)1 + 4500 (1+0.35)2 + 1500 (1+0.35)5 8000 + (1+0.35)4 + 11000 (1+0.35)5 - 100000 = 37037 + 2469.14 + 6096.63 + 2408.55 + 2453.14 - 100000 = $ - 82868.84 Therefore, the project should be rejected due to the loss incurred (Gallo, 2014). 2.0 When interest rates decline, bond prices rise, conversely when interest rates rise, bond prices fall. Bonds compete on the interest they provide to investors. When interest rates rise new bonds being issued, have higher interest rates hence give more income to investors, 3 When rates decline, the bonds will have lower interest rates and will not be attractive as older bonds. However, when rates rise, older lower rate bonds cannot increase their interest rates to the same level as the new higher interest bonds (Patel et al., 2015). The older bond rates will be clocked in based on the initial terms (Patel et al., 2015). If bond prices remained fixed before maturity, the investor would sell at a lower cost per value or below the purchasing price. The dividend discount model is used to determine the intrinsic value of a stock by summing up the present value of all future expected dividend. 𝑃= 𝐷1 ...
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