Problem 1: Assume a $4,000 investment and the following cash flows for two alternatives.
|
Year
|
Investment X
|
Investment Y
|
|
1
|
$1,000
|
$1,300
|
|
2
|
800
|
2,800
|
|
3
|
700
|
100
|
|
4
|
1,900
|
|
|
5
|
2,000
|
|
a. Under the payback method, which investment should be chosen? (Show your work/analysis/calculations for each investment).
b. Why do other methods allow for a better analysis?
Problem 2: A ten-year bond pays 11% interest on a $1000 face value annually. If it currently sells for $1,195, what is its approximate yield to maturity? (Show all work/calculations/formulas)