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Homework answers / question archive / 1 Suppose security C pays $800 if the economy is weak and $200 if the economy is strong
1 Suppose security C pays $800 if the economy is weak and $200 if the economy is strong. Risk free rate is 5% and the market index security (MIS) pays $800 and $1400 is the economy is weak and strong, correspondingly. MIS is priced at $950
1. A project has the following net cash flow series : End of Year Cash Low 0 -100 1 -30 2 -20 3 0 4 120 5 220 6 320 Assume i = 15%. Determine the present worth of the project (5 Points) 280 -75 175 200 2. Determine the project balance at the end of year 2 (5 Points)
1 please find attached.
2
1. What is the Present value of the project.
The below table shows the present value calculation for the given cashflow with discounting factor (i) = 15%
| Year end | Cash flow | DF @ 15% | PV |
| 0 | -100 | 1.0000 | (100.00) |
| 1 | -30 | 0.8696 | (26.09) |
| 2 | -20 | 0.7561 | (15.12) |
| 3 | 0 | 0.6575 | - |
| 4 | 120 | 0.5718 | 68.61 |
| 5 | 220 | 0.4972 | 109.38 |
| 6 | 320 | 0.4323 | 138.34 |
| NPV | 175.12 |
Based on the above table, the answer is Option 3 -- 175.
2. Determine the project balance at the end of year 2.
Project balance is the cumulative cash flows including the initial cash flow. The below table shows the workings for project balance till the end of year 2.
| Year end | Cash flow | Project balance |
| 0 | -100 | -100 |
| 1 | -30 | -130 |
| 2 | -20 | -150 |
Based on the above workings, the project balance at the end of Year 2 is -150.
