1. Which of the following statements is true of a capital budgeting project with a negative net present value (NPV)?
A. The project's discounted payback period is greater than its economic life.
B. The project's internal rate of return is also negative.
C. The project's traditional payback period is greater than the firm's expected payback period.
D. A firm should invest in a project with a negative NPV if the initial investment outlay is low.
E. The project's internal rate of return is higher than the discount rate used for NPV analysis.
2. Assume that a trader wants to create a derivative with the following value function:
V (t, s) = St^2
(St square)
Prove that this is not a valid derivative by checking the Black-Scholes PDE.
(Answer in detail. No Excel work please)