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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