1. An investor is considering making an investment in one or both of two projects.

The
cashflows associated with the projects are as follows. The unit of time is years.

Project A: Initial payments of £2 million at time zero and £4 million at time 2 are made.
In return a sum of £900,000 per annum is paid continuously from time 5 to time 25.

Project B: Regular payments of £100,000 are made at the start of each year for 10 years.
In return, amounts of X, 2X, 3X and so on are made annually for 10 years, the first
payment being made at time 11.

(i) Find the net present value of Project A at an effective annual interest rate of 10%.
[2 Marks]

(ii) Show that the internal rate of return for Project A is 9.38% pa. [2 Marks]

(iii) Find the value of X if the internal rate of return for Project B is the same as that
for Project A. [3 Marks]

(iv) Find the value of X if both projects are to have the same net present value at 10%
pa. [3 Marks]
2. Superman’s cousin from Krypton is currently aged exactly 48 years. When she expires
from serving the King and Queen of Krypton, she will be 60 years, and will receive an
income of 35 Krypton Galaxy Coin per ‘Earth’ week. All beings on the Krypton explode
and die at exact age 76 years. Calculate the present value of the retirement benefits at
10% pa effective the cousin will receive. Assumption: 52.18 weeks in a year. [3 Marks]

3. A bond is issued at time t = 0 at a price of $107.60 per $100 nominal. The bond pays
coupons of 6% p.a., annually in arrears, and will be redeemed at par in 3 years’ time.

The 2-year par yield at time t = 0 is 6.5% p.a. The 1-year forward rate of interest at time
t = 1 year is 4.5% p.a. effective.

Calculate, showing all working and assuming no arbitrage, the implied 1-year, 2-year, and
3-year annual effective spot rates. [7 Marks]