BEAM047A - Problem Set for Lecture 1
1. Bruce was offered three investment opportunities, the cash flows of which are captured in the following table:
Projects 0 1
A 2, 000 500
B -6, 800 10, 000
C 4, 000 -2, 000
(a) Knowing that Bruce eventually chose investment A, find the range of the discount rate (r).
(b) Plot the Present Value of the three investments against values of r.
2. You are considering buying a car worth $20, 000. The dealer, who is anxious to sell the car, offers you an attractive financing package. You have to make a downpayment of $2, 000 and pay the rest over 5 years with monthly payments at a quoted monthly APR of 2%.
(a) What is the monthly payment to the dealer?
(b) How much do you owe the dealer immediately after the fifteenth monthly payment?
(c) The dealer offers you a second option: you pay cash today, but get a $1, 500 rebate.
Should you go for the loan or should you pay cash? Assume that your discount rate is 4% (monthly APR).
(d) (Challenge) Given that the dealer is indifferent between the two options, what is the interest rate he is really charging you? What would the payment be if the interest rate...