A project with an initial investment of $449,300 will generate equal annual cash

Question

A project with an initial investment of $449,300 will generate equal annual cash flows over its 10-year life. The project has a required return of 8.9 percent. What is the minimum annual cash flow required to accept the project?

$74,638.31

$64,435.34

$79,659.56

$66,657.24

$69,702.11

An asset has an average return of 10.55 percent and a standard deviation of 19.35 percent. What range of returns should you expect to see with a 68 percent probability?

47.50% to 68.60%

8.80% to 29.90%

28.15% to 49.25%

18.48% to 39.58%

8.80% to 12.30%

A stock had returns of 14.43 percent, 18.87 percent, 14.99 percent, 12.39 percent, and 25.37 percent for the past five years. What is the variance of the returns?

.02872

.00282

.02393

.15471

.03191

Explanation / Answer

1. Computation of MInimum Annual cash Flow

For Minimum Annual Cash Flow

Present Value of Outflow = Present Value of Inflow

$449300 = Cash Flow * PVAF(8.9%, 10)

$449300 = Cash Flow * 6.4460

Minimum Annual Cash Flow = $69702.11 (Option D)

2. Computation of Range of Returns

For 68% Confidence interval, Returns will fall in +19.35% or -19.35% it means one standard deviation

Thus Range of Returns = (Average Return - Standard Deviation) to (Average Return + Standard Deviation)

Range of Returns = (10.55% - 19.35%) to (10.55% + 19.35%)

Range of Returns = -8.80% to 29.90% (Option B)

3. Computation of Varaince of Returns

Average of Return X = Total Return / No. of Years

Average of Return X = (14.43 + 18.87 -14.99+12.39-25.37) / 5

Average of Return X = 11.21%

Variance of Returns = Summation (Actual Return - Average Return)^2 / no. of years

Variance of Returns = (0.1443 - 0.1121)^2 + (0.1887 - 0.1121)^2 + (-0.1499 - 0.1121)^2 + (0.1239 - 0.1121)^2 + (-.2537 - 0.1121)^2 / 5

Variance of Returns = 191.48

There is some wrong with the information provided but as per given informatio. but as per given infor 191.48 is the correct answer

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