FM for Actuaries

144 CHAPTER 4
Year Cash flow ($)
0 500
1 –600
2 100
3 –120
Calculate the balance of the fund after 3 years. Is the project profitable?
4.47 A used scanner can be purchased for $150 cash or for $65 down payment
and $50 at the end of each of the next two half-years. If you have a nominal
interest preference rate of 7% convertible semiannually, will you pay cash
now or pay by installments?
4.48 Consider the investment project given in the following table:
Year Cash flow ($)
0 919.15
0.5 −42.00
1.0 −42.00
1.5 −42.00
2.0 −1,092.00
At what required rate of return (expressed as a nominal rate convertible semiannually)
will you accept the project? Will the NPV rule and the IRR rule
give you the same result?
4.49 Beda borrows a $10,000 loan from Wendy for 5 years at an effective rate of
interest of 8% per year. Wendy offers two options for Beda to repay the loan.
1: Interest payments due at year end are paid at year end, and the principal
is repaid after 5 years.
2: The loan is repaid by five level payments over the 5 years. Wendy can
only reinvest the repayments of Beda at 7% per annum.
(a) Calculate the yield rate of Wendy under Option 1.
(b) Calculate the yield rate of Wendy under Option 2. Explain why the
answer obtained is smaller than that in (a).