Question 4 a. The stock market provides an annual return of 8.4%. A risky project costs £35,000 but provides £20,000 cash flow for two years. Would you invest in the project? Why/Why Not?
Question 4 a. The stock market provides an annual return of 8.4%. A risky project costs £35,000 but provides £20,000 cash flow for two years. Would you invest in the project? Why/Why Not?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
![Question 4
a. The stock market provides an annual return of 8.4%. A risky project costs £35,000 but provides
£20,000 cash flow for two years. Would you invest in the project? Why/Why Not?
b. Assume in order to undertake this project the firm needs to undertake project 2 that costs
£12,000 but provides a one-year cash flow of £13,500 and project 3 that costs £8,000 but
provides three years of cash flow of £3,000. Will the firm still take on the project and how much
will firm value and increase?
c. Your client has been given a trust fund valued at £1.25 million. He cannot access the money
until he turns 65 years old, which is in 25 years. At that time, he can withdraw £24,000 per month.
If the trust fund is invested at a 4.5 percent rate, compounded monthly, how many months will it
last your client once he starts to withdraw the money?
d. You are comparing houses in two towns in Sheffield. You have £100,000 to put as a down
payment, and 30-year mortgage rates are at 8%
Location 1
Location 2
£ 300,000
£ 12,000
Price of the house
£ 400,000
Annual Property Tax
£ 6,000
i. Estimate the total payments (mortgage and property taxes) you would have on each house.
Which one is less expensive?
Marks]
ii. Are mortgage payments and property taxes directly comparable? Why or why not?
iii. If property taxes are expected to grow 3% a year forever, which house is less expensive?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8c35567e-5a8e-4edb-8a66-66d161b7f95c%2Ffff42c7b-7258-46ec-8a44-79e4b2dae9fc%2Fr0tsu9l_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Question 4
a. The stock market provides an annual return of 8.4%. A risky project costs £35,000 but provides
£20,000 cash flow for two years. Would you invest in the project? Why/Why Not?
b. Assume in order to undertake this project the firm needs to undertake project 2 that costs
£12,000 but provides a one-year cash flow of £13,500 and project 3 that costs £8,000 but
provides three years of cash flow of £3,000. Will the firm still take on the project and how much
will firm value and increase?
c. Your client has been given a trust fund valued at £1.25 million. He cannot access the money
until he turns 65 years old, which is in 25 years. At that time, he can withdraw £24,000 per month.
If the trust fund is invested at a 4.5 percent rate, compounded monthly, how many months will it
last your client once he starts to withdraw the money?
d. You are comparing houses in two towns in Sheffield. You have £100,000 to put as a down
payment, and 30-year mortgage rates are at 8%
Location 1
Location 2
£ 300,000
£ 12,000
Price of the house
£ 400,000
Annual Property Tax
£ 6,000
i. Estimate the total payments (mortgage and property taxes) you would have on each house.
Which one is less expensive?
Marks]
ii. Are mortgage payments and property taxes directly comparable? Why or why not?
iii. If property taxes are expected to grow 3% a year forever, which house is less expensive?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education