@ o © E12 Homework 3 Due Monday 03/02/2015 ‘You are considering investing in new gold mine in South Aftica. Goldin South Aftica {is buried very deep, so the mine require an intial investment of $280 million. Once thie investment in mate, the mine is expected to produce revenues of $ 30 million per year for the next 20 years It will cost 8 10 million per year to operate the mine. After 20 years, the gold wll be depleted. the mine must then be stabilize on an ongoing, basis, which will cat § 5 milli per year in perpetuity. Plot the PV of the cash flow ‘of this investment as function of the interest rate r and then calcalate the IRR of this investment ‘Note: You are weloome to use any software to plot the graph and do the computation. ‘Attach the plot wth your eode (if any) vo your submission. Professor Wendy Smith has been offered the following deal: A law firm would lke to retain her for an upfront payment of $50,000. In return, for the next year the frm ‘would have to access to 8 hours of her time every month, Smith's rae is $550 per hour and her opportunity cast of capital ie 16% (RAR) What dose the IRR rule advise regarding this opportunity? What about the PV rule? Please indicate whether each ofthe following statements is true ot false. If it is true, cexplain/prove why itis true. If tis false, explain why or provide a counterexample. ‘Gredit will not be given unless an explanation is provided. Given an APR of 129 compounded vemiannaly, the eective monthly rate i i Suppose you have two cash flows (0,2,2.2,.) and (0,1,3,1,3,.), then for any interest rate the PV ofthe first cash fow is greater than or equal to the PV of the second cash ow. ‘Your litle sister propcees the following game to you. On day 1, you will give her ‘81. On day 2, she will give you $2. And in general, you will give her $i on day if ‘is odd, and she will give you $i on day fis even (so that the cash flow from your point of view is (0-1.2-8,4-5,6,..)). Living in a hypothetical world where Interest rate per day is 10%, should you take up her offer?