FM for Actuaries

142 CHAPTER 4
4.40 The cash flows for the first 3 years of an investment are as follows:
Year Cash flow ($)
0 500
1 –600
2 1,000
3 –1,200
Let the borrowing rate be 12% and the lending rate be 10%. Calculate the
balance after 3 years.
4.41 The cash flows of a 5-year investment are as follows:
Year Cash flow ($)
0 1,500
1 500
2 –2,500
3 700
4 –1,000
5 450
Let the borrowing rate be 10% and the lending rate be 8%. Calculate the
balance after 5 years. Will you accept the investment if it terminates in 5
years?
4.42 Consider a 4-year project with an initial investment of $10,000. A cash
amount of $23,100 will be generated after 2 years, and the project will be
terminated with fund injection of $13,300 at the end of year 4.
(a) Draw a graph of the NPV versus the required rate of return for the
project.
(b) If you have a required rate of return of 8% per annum, will you be
interested in the project based on the NPV rule? Will the IRR rule
work in this problem?
4.43 Consider a 2-year project requiring a cash injection of $200 immediately and
$230 after 1 year for an income of $500 at the end of year 2.