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CIVL 2812 - Project Appraisai Tutorial Question4.2 Objectives:

Understand the assumptions underlying each method including NPV, NFV, Annual Worth, IRR, ERR and payback period.

Able to apply the methods to a given project.

Problem 5-40

In July of 2012, Taylor purchased 2,000 shares of XYZ common stock for $75,000.He then sold 1.000 shares of XYZ in July of 2013 for $39 per share. The remaining 1,000 shares were finally sold for $50 per share in July 2014. (5.6,5.7)

a.    Draw the cash flow diagram of this situation.

b.    What was Taylor’s intemal ratę of return (IRR) on this investment?

c.    What was the ERR on this imestment if the extemal reim estment ratę is 8% per year?

Problem 5-42

5-42. Sergeant Jess Frugal has the problem of running out of money near the end of each month (he gets paid once a month). Near his army base there is a payday lender company, called Predatory Lenders, Inc., that will give Jess a cash advance of $350 if he will repay the loan a month later with a post-dated check for $375. Almost as soon as FrugaTs check for $375 clears the bank, he unfortunately must again borrow $350 to make ends meet. Jess's wife has gotten a bit concerned that her husband might be paying an exorbitant interest ratę to this payday lender. Assuming Jess has repeated this borrowing and repayment scheme for 12 months in a row, what effective annual interest ratę is he really paying? Is Jess's wife correct in her worry? Hint: Draw a cash-flow diagram from the viewpoint of the lender. (5.6)