Question#1 A company has an investment project that would cost $10 million today

Question

Question#1

A company has an investment project that would cost $10 million today and yield a payoff of $15 in four years.

a. Should the firm undertake the project if the interest rate is 11percent? 10 percent?, 9 percent?, 8 percent?

b. Can you figure out the exact cutoff for the interest rate between profitability and nonprofitability?

_____________________________________________________________________________

Question#2

According to an old myth, Native Americans sold the island of Manhattan about 400 years ago for $24.00 . If they had invested this amount ay an interest rate of 7 percent per year, how much would they have today?

Explanation / Answer

The formula would be as follows:

(cost of project)*(1+interest rate)^(time in years)=payoff

Since we want to find the rate, we use algebra to put the interest rate by itself:

(payoff/cost of project)^(1/time)-1=interest rate

(15/10)^(1/4)-1= 10.668%

Any project with an interest rate below 10.668% is profitable.
At 10.668% is break-even
Above 10.668% is a loser

only one question per post :) cramster rule

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.