Net present value : Net present value is the difference between the present values of cash inflows minus present value of cash outflows. Calculate the cost of retained earnings are as follows: Net present value = Present value of cash inflows − Initial investment Decision rule: NPV > 0 Accept the project NPV < 0 Reject the project OOG is considering to replace an asset with new one which has cost of $153,800 and old machine has book value of $8,000. Asset is classified under five years MACRS class and can be sold after five years for 10,800. Savings from the machine is increases from $70,000 to $110,000. Life of the project is 5 years, tax rate is 40% and required rate of return is 12%.

Question

An insurance company has liabilities of £7 million due in 10 years' time and £9 million due in 17 years' time. The assets of the company consist of two zero-coupon bonds, one paying £X million in 7 years' time and the other paying £Y million in 20 years' time. The current interest rate is 6% per annum effective. Find the nominal value of X (i.e. the amount, IN MILLIONS, that bond X pays in 7 year's time) such that the first two conditions for Redington's theory of immunisation are satisfied. Express your answer to THREE DECIMAL PLACES.

Answer 1

Question

Chapter 10, Problem 14PROB

Summary Introduction

Net present value:

Net present value is the difference between the present values of cash inflows minus present value of cash outflows.

Calculate the cost of retained earnings are as follows:

Net present value=Present value of cash inflows−Initial investment

Decision rule:

NPV>0 Accept the projectNPV<0 Reject the project

OOG is considering to replace an asset with new one which has cost of $153,800 and old machine has book value of $8,000. Asset is classified under five years MACRS class and can be sold after five years for 10,800. Savings from the machine is increases from $70,000 to $110,000. Life of the project is 5 years, tax rate is 40% and required rate of return is 12%.

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