5.You own a plant producing oil. On 2017 the plant produced aquantity of 2,500 barrels of oil. The market price of a barrel ofoil at 1.1.2018 is $50. Assume the plant's oil production isperpetual (lasts forever), all cash flows are received at the endof the year and the annual interest rate is 8%.
Calculate the plant's economic value at 1.1.2018 under thefollowing scenarios. (The plant's value is equal to the presentvalue of all the future cash flows it is expected to generate)
a.Oil production and the price of oil will remain constant attheir present levels.
b.Oil production is constant, the price of oil increases at arate of 3% per year.
c.Oil production increases at a rate of 9% each year, the priceof oil remains constant.
7.The effective annual interest rate is 15%.
a.What is the effective interest rate for two years (accumulatedover 2 years with interest over interest)?
b.What is the effective interest rate for ten years (accumulatedover 10 years with interest over interest)?
c.Assume interest is compounded monthly. What is the monthlyinterest rate?
d.What is the simple annual interest rate?
e.What is the simple interest rate for 2 years? For 10years?
8.
You deposit $175,000 in a savings account. The APR (AnnualPercentage Rate) is 6%. Calculate the following:
a. Assuming that the interest is compounded once a year, what isthe amount accumulated after ten years?
b. Assuming that the interest is compounded every month, what isthe amount accumulated after ten years?
c. Assuming that the interest is compounded every day, what isthe amount accumulated after ten years?
d. What is the observed effect of compounding at a higherfrequency on the amount of money accumulated? Explain.