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##### Calculate the present value in each of the following cases. Show your work.

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**Question**

Calculate the present value in each of the following cases. Show your work.;a.;You are negotiating a book deal for your newest novel in which an economist singlehandedly saves the world. The publisher offers to pay you an advance of $1 million today;plus $500,000 at the end of each of the next three years. What is the present value of these;payments, given your rate of discount of 5 percent?;b.;You counter the publishers offer with a counter-offer that will pay you $1.5 million today;plus $5 per book sold in each of the next three years. You think you will sell 80,000 books;each year in that period, but the publisher thinks you will only sell 40,000 books each year.;Explain why both you and the publisher like this offer better than the deal in part a.;2.;Julia is considering buying stock in only one of the following companies: (i) Uninvest.com;which runs a Web site geared toward older peoples retirement income and has a 10 percent;probability of returning 20 percent this year and a 90 percent probability of returning 7;percent, or (ii) Speculate, Inc., which invests in derivative securities and has a 50 percent;chance of returning 0 percent this year and a 50 percent chance of returning 50 percent.;a.;b.;c.;d.;What are the expected returns to investing in Uninvest and Speculate?;What are the standard deviations of the returns to Uninvest and Speculate?;If Julia is very risk-averse, which companys stock should she buy?;If Julia is risk-neutral (that is, she does not worry about risk at all), which companys stock;should she buy?;3.;Consider three alternative bonds that you might invest in, each of which matures in one;year. The following table shows the probability that you will receive each possible return.;For example, if you buy bond A, the probability is 90 percent that your return will be 20;percent and the probability is 10 percent that your return will be 100 percent (in other;words, you lose the entire amount invested).;Bond

Paper#25468 | Written in 18-Jul-2015

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