What is the Internal Rate of Return (IRR) of the project detailed in the table below?

Assume that the cash flows shown in the table are paid all at once at the given point in time. All answers are given as effective annual rates.

Project Cash Flows | |

Time (yrs) | Cash flow ($) |

0 | -100 |

1 | 0 |

2 | 121 |

There are a number of ways that assets can be depreciated. Generally the government's tax office stipulates a certain method.

But if it didn't, what would be the ideal way to depreciate an asset from the perspective of a businesses owner?

**Question 218** NPV, IRR, profitability index, average accounting return

Which of the following statements is **NOT** correct?

An old company's Firm Free Cash Flow (FFCF, same as CFFA) is forecast in the graph below.

To value the firm's assets, the terminal value needs to be calculated using the perpetuity with growth formula:

###V_{\text{terminal, }t-1} = \dfrac{FFCF_{\text{terminal, }t}}{r-g}###

Which point corresponds to the best time to calculate the terminal value?

**Question 408** leverage, portfolio beta, portfolio risk, real estate, CAPM

You just bought a house worth $**1,000,000**. You financed it with an $**800,000** mortgage loan and a deposit of $**200,000**.

You estimate that:

- The house has a beta of
**1**; - The mortgage loan has a beta of
**0.2**.

What is the beta of the equity (the $200,000 deposit) that you have in your house?

Also, if the risk free rate is **5**% pa and the market portfolio's return is **10**% pa, what is the expected return on equity in your house? Ignore taxes, assume that all cash flows (interest payments and rent) were paid and received at the end of the year, and all rates are effective annual rates.

A firm plans to issue equity and use the cash raised to pay off its debt. No assets will be bought or sold. Ignore the costs of financial distress.

Which of the following statements is **NOT** correct, all things remaining equal?

In Australia in the 1980's, inflation was around 8% pa, and residential mortgage loan interest rates were around 14%.

In 2013, inflation was around 2.5% pa, and residential mortgage loan interest rates were around 4.5%.

If a person can afford constant mortgage loan payments of $**2,000** per month, how much more can they borrow when interest rates are **4.5**% pa compared with **14.0**% pa?

Give your answer as a proportional increase over the amount you could borrow when interest rates were high ##(V_\text{high rates})##, so:

###\text{Proportional increase} = \dfrac{V_\text{low rates}-V_\text{high rates}}{V_\text{high rates}} ###

Assume that:

- Interest rates are expected to be constant over the life of the loan.
- Loans are
**interest-only**and have a life of**30**years. - Mortgage loan payments are made every month in arrears and all interest rates are given as annualised percentage rates (
**APR**'s) compounding per**month**.

The current gold price is $**700**, gold storage costs are **2**% pa and the risk free rate is **10**% pa, both with **continuous compounding**.

What should be the **3** year gold futures price?

Alice, Bob, Chris and Delta are traders in the futures market. The following trades occur over a single day in a newly-opened equity index future that matures in one year which the exchange just made available.

1. Alice buys a future from Bob.

2. Chris buys a future from Delta.

3. Bob buys a future from Chris.

These were the only trades made in this equity index future. What was the trading volume and what is the open interest?

**Question 771** debt terminology, interest expense, interest tax shield, credit risk, no explanation

You deposit money into a bank account. Which of the following statements about this deposit is **NOT** correct?