January 30, 2018
January 30, 2018

# Assignment

1. Since 1 Sept 2010, Cathy’s investment policy has been to lodge fixed (term) deposits at her local bank. The bank pays interest on the maturity date of a deposit and the interest rate is expressed as an annual simple interest rate. When a deposit matures, Cathy’s policy is to re-lodge the whole sum (principal and interest) immediately for a further period. She chooses the term of each deposit according to her assessment of the interest rates available at that time. Cathy’s decisions to date are as follows:

1 Sept 2010              6-month deposit at 9% per annum

1 March 2011            8-month deposit at 9.15% per annum

1 November 2011    10-month deposit at 8.75% per annum

Calculate, as at 1 Sept 2014, the effective annual interest rate Cathy has earned since she began this policy. (Assume that all months are of equal length.) Briefly explain each step.

1. The Three-Dot Mining Company has constructed a town at Big Bore. The town will be abandoned when mining operations cease after an estimated 5-year period. The following estimates of investment costs, sales and operating expenses relate to a project to supply Big Bore with meat and agricultural produce over the 5-year period by developing nearby land.
• Investment in land is \$8 million, farm buildings \$2 000 000 and farm equipment \$3 000 000. The land is expected to have a realisable value of \$4 000 000 in 5 years’ time. The residual value of the buildings after 5 years is expected to be \$400 000. The farm equipment has an estimated life of 5 years and a zero residual value.
• Investment of \$2 300 000 in current assets will be recovered at the termination of the venture.
• Annual cash sales are estimated to be \$21million.
• Annual cash operating costs are estimated to be \$18 million.

Is the project profitable, given that the required rate of return is 10 per cent per annum?

1. Using the following data, calculate the:
• Accounting rate of return
• Payback period
• Internal rate of return
• Net present value

 Project cost: \$150 000 Estimated life: 4 years Estimated residual value: \$30 000 Annual net cash flow: \$40 000 Required rate of return: 9%

How would your answers differ if the net cash flows were as follows?

 Year 1 \$50 000 Year 2 \$30 000 Year 3 \$60 000 Year 4 \$80 000

1. The standard deviations of returns on assets A and B are 12 per cent and 6 per cent, respectively. A portfolio is constructed consisting of 30 per cent in Asset A and 70 per cent in Asset B. Calculate the portfolio standard deviation if the correlation of returns between the two assets is:

1. 1
1. 5
1. 0
1. –1