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Mathematics Department
2. A firm has a capital budget of 100 which must be spent on one of two projects, each
requiring a present outlay of 100. Project A yields a return of 120 after one year,
whereas Project B yields 201.14 after 5 years. Calculate:
(ii) (i) The NPV of each project using a discount rate of 10%;
(ii) The IRR of each project.
(iii) What are the project rankings on the basis of these two investment decision
rules?
Solution
1
3. You are given the following rates of interest rate
Where
• Columns iy1 , iy2 , iy3 iy4 , iy1 are Investment Year Rates in %.
• Column iy+5 are Portfolio Rates.
2
4. Fund X has unit values which are 1.0 on January 1, 2015, 0.8 on July 1 2015 and 1.0
on January 1 2016. A fund manager receives contributions of 100, 000 on January
1, 2015 and 100, 000 on July 1 2015 and immediately uses the entire contribution
to purchase units in Fund X. Find the time-weighted and the dollar-weighted rate
return for 2015.
Solutions
iT = 0, iD = 0.1667
5. You are given the following information about activities in two different investment
accounts:
During 2015, the dollar weigted return for investiment account K equals the time
weighted return for investiment account L which is i. Calculate i.
Solution
i = 0.15
6. On January 1, 2012 an investiment account is workth 100, 000. On April 2013 the
value has increases to 103, 000 and 8, 000 is withdrawn. On January 1 2015 the
account is worth 103, 992. Assuming the dollar-weighted method for 2013 and the
time weigthed method, the effective annual interest rate was equal to x for both
2013 and 2014. Calculate x.
Solution
x = .0625