Fifteen years ago, you deposited $12,500 into an investment fund. Five years ago, you added an
additional $20,000 to that account. You earned 8%, compounded semi-annually, for the first ten years,
and 6.5%, compounded annually, for the last five years.
a) What is the effective annual interest rate (EAR) you would get for your investment in the first 10
years? (2 marks)
b) How much money do you have in your account today? (4 marks)
c) If you wish to have $85,000 now, how much should you have invested 15 years ago? (4 marks)
Giant Equipment Ltd. is considering two projects to invest next year. Both projects have the same
start-up costs. Project A will produce annual cash flows of $42,000 at the beginning of each year for
eight years. Project B will produce cash flows of $48,000 at the end of each year for seven years. The
company requires a 12% return.
a) Which project should the company select and why? (5 marks)
b) Which project should the company select if the interest rate is 14% at the cash flows in Project B
is also at the beginning of each year? (5 marks)