Part a):Now that they have accumulated a deposit of 70,000, Jack and Jill intend to use the deposit to take out a housing loan to purchase a home. The house costs $640,000. The loan is to be repaid in equal monthly instalments (end of month) over a term of 25 years. The interest rate quoted by the Bank isj₁₂= 4.2%pa.

1. Calculate the effective annual rate on the loan.
2. How much is the monthly repayment?
3. How much principal is repaid in the 90_threpayment?
4. How much would they still owe at the beginning of the month of the 140_threpayment?

Part b):Polycorp is investigating two projects. The risk-free rate is 6%pa and the market premium is 6%pa. Project A has a beta of .7 and Project B has beta of 1.55. The projects are independent. If accepted the projects will initially be funded by borrowing at 7.5%pa. The relevant net cash flows for each project are below. The firm's current weighted average cost of capital is 11% pa (before taking either or both A and B). Assume no taxes. Calculate the NPV of each project and indicate which project or projects should be accepted/rejected. Explain your choice of the discount rate and your adjustment for risk.

year 0 1 2

a 10000 5400 7500

b 15000 8600 9400