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What Is Arbitrage And Calculation Of Net Present Value

Question

1. Peter has a business opportunity that requires him to invest $10000 today, and receive $12000 in one year. He can either use $10000 that he already has for this investment, or borrow the money from his bank at an interest rate of 10%. However, the $10000 he has right now is needed for urgent repairs to his home, repairs that will cost at least $15000 if he delays them for a year. What is the best alternative for Peter out of the following choices?

A. No, since the net present value (NPV) of the investment, should he take it, is less than the net present value of the home repairs if he delays them for one year.
B. Yes, since he can borrow the $10000 from a bank, repair his home, invest $10000 in the business opportunity, which, since it has a NPV > 0 will mean he will still come out ahead after repaying the loan.
C. Yes, since the net present value (NPV) of the investment is greater than zero he can invest the $10000 in the business opportunity, and then next year use this money plus the benefit from this money to make the necessary home repairs.
D. Yes, since the net present value (NPV) of the investment should he take it, is greater than the net present value of the home repairs if he delays them for one year.

2. Which of the following is an example of arbitrage?

A. An interior of a new hydrocarbon cracking technology based on palladium buys this metal knowing that its price will rise when the technology is adopted.
B. A metals merchant is offered $108,000 in one year for $100,000 of palladium today, when the interest rate is 10%.
C. An investor, seeing that the price of palladium on the metals exchange in two different countries is slightly different, buys on one and sells on the other to make a profit.
D. A firm buys $250,000 of palladium today, with an option to sell it at $275,000 in one year if interest rates rise above 10%.

Summary

These short questions belong to Finance. The 1st question is about a person assessing to put his money in an investment or to go for his home repairs. The 2nd question is about arbitrage..

Total Word Count 87

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