Financial investment

1.      How has the capital recovery amount changed for the Lloyd’s protectors with these new estimates?

2.      Determine the composite rate of return for the cash flows in Table 7-6 if the reinvestment rate is the MARR of 15% per year. Is the project justified?

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3.      A-I Mortgage makes loans with the interest paid on the loan principal rather than on the unpaid balance. For a 4-year loan of $10,000 at 10% per year, what annual payment would be required to repay the loan in 4 years if interest is charged on (a) the principal and (b) the unrecovered balance?

Wells Fargo Bank lent a newly graduated engineer $1000 at i = 10% per year for 4 years to buy home office equipment. From the bank’s perspective (the lender), the investment in this young engineer is expected to produce an equivalent net cash flow of $315.47 for each of 4 years. A = $1000(A/ P,10%,4) = $315.47 This represents a 10% per year rate of return on the bank’s unrecovered balance.

Compute the amount of the unrecovered investment for each of the 4 years using

(a) the rate of return on the unrecovered balance (the correct basis) and

(b) the return on the initial $1000 investment.

(c) Explain why all the initial $1000 amount is not recovered by the final payment in part (b) .

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