【正文】 al cost. The EAC is determined by dividing the net present value of costs by an annuity factor that has the same life as the machines. The machine with the lowest EAC should be acquired. What is the difference between the nominal and the real interest rate? The nominal interest rate is the real interest rate with a premium for inflation. Why did we determine ine when NPV Analysis discounts cash flows, not ine? Because we need to determine how much is paid out in taxes. Define sunk costs, opportunity costs, and side effects. 1. Sunk costs are costs that have already been incurred and that will not be affected by the decision whether to undertake the investment.2. Opportunity costs are costs incurred by the firm because, if it decides to undertake a project, it will forego other opportunities for using the assets.3. Side effects appear when a project negatively affects cash flows from other parts of the firm. How is the profitability index applied to independent projects, mutually exclusive projects, and situations of capital rationing?1. With independent projects, accept the project if the PI is greater than and reject if less than .2. With mutually exclusive projects, use incremental analysis, subtracting the cash flows of project 2 from project 1. Find the PI. If the PI is greater than , accept project 1. If less than , accept project 2.3. In capital rationing, the firm should simply rank the projects according to their respective PIs and accept the projects with the highest PIs, subject to the budget constrain.CONCEPT QUESTIONS CHAPTER 7 How does one calculate a project39。 What are two problems with the IRR approach that apply to both independent and mutually exclusive projects?1. The decision rule depends on whether one is investing of financing.2. Multiple rates of return are possible. How does one calculate the IRR of a project?Using either trialanderror or a financial calculator, one finds the discount rate that produces an NPV of zero. What are the three steps in calculating AAR?1. Determine average net ine.2. Determine average investment3. Divide average net ine by average investment. List the problems of the payback period rule.1. It does not take into account the time value of money.2. It ignores payments after the payback period.3. The cutoff period is arbitrary. What is the expectation hypothesis?Investors set interest rates such that the forward rate over a given period equals the spot rate for that period. Define the forward rate.Given a oneyear bond and a twoyear bond, one knows the spot rates for both. The forward rate is the rate of return implicit on a oneyear bond purchased in the second year that would equate the terminal wealth of purchasing the oneyear bond today and another in one year with that of the twoyear bond. What is the annual dividend of General Host? The annual dividend of General Host is zero.CONCEPT QUESTIONS Appendix to Chapter 5 What is the closing price of General Data? The closing price of General Data is 6 3/16. s P/E ratio?1. Today39。 How does one calculate the yield to maturity on a bond?One finds the discount rate that equates the promised future cash flows with the price of the bond. Contrast the state interest rate and the effective annual interest rate for bonds paying semiannual interest.Effective annual interest rate on a bond takes into account two periods of pounding per year received on the coupon payments. The state rate does not take this into account. What are four tricks concerning annuities?1. A delayed annuity.2. An annuity in advance3. An infrequent annuity4. The equating of present values of two annuities.CONCEPT QUESTIONS CHAPTER 5 What are the formulas for perpetuity, growingperpetuity, annuity, and growing annuity? Perpetuity: PV = C/r Growing Perpetuity: PV = C/(rg) Annuity: PV = (C/r) [11/(1+r)T] Growing Annuity: PV = [C/(rg)] [1((1+g) / (1+r))T ] What is the relationship between the stated annual interest rate and the effective annual interest rate? Effective annual interest rate = (1 + (r/m) )m 1. What is a stated annual interest rate?The stated annual interest rate is the annual interest rate without consideration of pounding. What is the formula for the net present value of a project? T NPV = C0 + 229。 How does one use net present value when making an investment decision?One determines the present value of future cash flows and then subtracts the cost of the investment. If this value is positive, the investment should be undertaken. If the NPV is negative, then the investment should be rejected. In terms of the netpresentvalue rule, what is the essential difference between the individual and the corporation. The main difference is that firms have no consumption endowment.CONCEPT QUESTIONS CHAPTER 4 What information does a person need to pute an investment39。 What is the separation theorem? Why is it important?The separation theorem says that the decision as to whether to undertake a project (pared to the financial markets) is independent of the consumption preferences of the individual. It is important because we can make investment decisions based on objective data, disregarding personal preferences. Describe the basic financial principle of investment decisionmaking?An investment project is worth undertaking only if it is mores desirable than what is available in the financial markets. What is the most important feature of a petitive financial market?No investor, individual or corporation can have a significant effect on total lending or on interest rates. Therefore, investors are price takers. s degree of impatience?A person39。 How does an individual change h