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The question said project Alpha will start in 6 months’ time, why we need to inflate the 10% for year 1’s sales revenues, but not half of the 10% inflation or 1.5 times the 10% inflation?
We always assume that flows increase at yearly intervals. Here we assume that the first increase occurs when the project starts and so the whole of the first years revenue will be 10% higher than the current estimates.
sir there is no mention in the answer of the fact that duration measures the average amount of time to pay back the present value of the project. Project beta has a lower duration. Secondly, it measures the sensitivity of the present value to changes in the discount factor. There is also no mention of this. Please could you explain why this is not relevant for this question.
quote from answer ” High interest rates will be attractive to international investors,
as they can get higher returns and may lead to the Y$ becoming stronger relative to other currencies.” Don’t high interest rates in comparison to other countries mean a depreciation of the currency as per interest rate parity?
Thanks for all your helpYour first question:
The question does not ask for a general discussion about the duration. It asks for an evaluation as to which project Okan should choose based on the factors that Okan considers to be important.
These factors are listed in the last sentence of the first paragraph of the question and as far as the duration is concerned the factor is “the projects risk as measured by their durations”.Your second question:
Interest rate parity determines forward exchange rates. As far as future spot exchange rates are concerned then for calculations in the exam we use inflation rates (which in theory will move with interest rates) but in practice there was many factors which effect them. One certainly is demand for the currency and if (for whatever reason) there is higher demand for a particular currency then this will tend to strengthen the currency.
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