By Dina - 12/14/2010 10:54:20 PM
For problem 18 part b in chapter 9 (Module 8) my solution manual says that with a fixed price contract the present value of assets is equal to:
$20 mil/.09 + $10mil*annuity factor 6%,10years + $10 mil/(.09*1.09^9)
Shouldn't the last part be $10mil/(.09*1.09^10)? This is a perpetuity immediate, right, so the first payment of the perpetuity is made at time 11 and they're all discounted back to time 10 with the $10 mil/.09 factor. So then to bring it back to time 0 you need to discount by 1.09^10, right?
Also for problem 22 in the same chapter my solution manual says:
NPV at time 2 = either 0 or 833,333
NPV at time 0 = -500,000 +[.4*0+.6*8333,333]/(1.4^2)
Where did they get the 1.4? Is this supposed to be 1.2? Or am I missing something?
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