Answered: Use an 8-year analysis period and a 10%…

Use an 8-year analysis period and a 10% interest rate to determine which of the alternatives below should be selected. What is the NPV of both alternatives and which should be selected.

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

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Question

Use an 8-year analysis period and a 10% interest rate to determine which of the
alternatives below should be selected. What is the NPV of both alternatives and which
should be selected.
1
First Cost
Uniform Annual Benefit
$5,300
$1,800
4
$10,700
$2,100
8
Useful Life in Years

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Compute the price of the European call option using the R program introduced in class where K = 100, S0 = 85, r = 10%, σ = 25% and T=0.5 Year. a. Use the Black-Scholes-Merton formula. b. Use the Monte-Carlo method. (Decide on the number of iterations and time step by your own) c. Compare the results in part a and b. d. Do the same calculations for the put option price where all parameters are the same
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