(IRR) Consider the following two plans for fixed deposit with an initial principal $100,000. Plan A...

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(IRR) Consider the following two plans for fixed deposit with an initial principal $100,000. Plan A is to deposit the initial principal today for 1 year at a fixed deposit rate 2.2% per annum; Plan B is to first deposit the initial principal today for 6 months at a fixed deposit rate 2% (per annum), and immediately renew the deposit at a fixed deposit rate R (per annum) for the subsequent 6 months. Assume that during the renewal, only the initial principal is deposited for the subsequent 6 months (so you take out the interest for the first 6 months and do not deposit the interest in the renewal). Using IRR analysis, for what range of R, Plan B is better than Plan A? Hint: In the IRR analysis, you may define each 6 months as a period (so 2 periods in total). Write out the cash flows today and at the end of each period, and compare the IRR. (IRR) Consider the following two plans for fixed deposit with an initial principal $100,000. Plan A is to deposit the initial principal today for 1 year at a fixed deposit rate 2.2% per annum; Plan B is to first deposit the initial principal today for 6 months at a fixed deposit rate 2% (per annum), and immediately renew the deposit at a fixed deposit rate R (per annum) for the subsequent 6 months. Assume that during the renewal, only the initial principal is deposited for the subsequent 6 months (so you take out the interest for the first 6 months and do not deposit the interest in the renewal). Using IRR analysis, for what range of R, Plan B is better than Plan A? Hint: In the IRR analysis, you may define each 6 months as a period (so 2 periods in total). Write out the cash flows today and at the end of each period, and compare the IRR.

Answer rating: 100% (QA)

SOLUTION To compare the two plans using IRR analysis we need to calculate the cash flows for each pl... View the full answer