1. Home Work Daddikins is planning on sending his daughter Darla Darling to SIU. He needs to plan for her housing. He could rent an apartment near the University from Carbondale Cathy for $650/month. He could rent an apartment in DeSoto from DeSoto Dick for $300/month. If he puts Darla in DeSoto she will have to commute to school, which means he will have to upgrade her car. Upgrading the car to get her out of Carbondale will cost $4,000. Additionally, Darla will be driving about 20 miles each day to make the trip. The operating and maintenance cost for the vehicle will be about 20 cents per mile. Daddikins figures Darla will drive 25 trips each month in her car to Carbondale. Both landlords will want first and last months rent up front. Daddikins figures Darla will take 5 years to graduate. Is it “worth it” for Daddikins to put Darla in DeSoto? (a)- Write down the cash flow that Daddikins will see if he puts Darla in DeSoto (Hint - remember that money out of Daddikins pocket is negative. Note that Daddikins “right now” payments will be upgrading the car and paying first and last months rent to the landlord. He will then pay rent each month for 5 years)

2. Cont. (b)- Next write down the cash flow if he skips the car and puts her in Carbondale. (Hint - Daddikin’s “right now” payments will be first and last months rent. Then he will pay rent monthly for the next 5 years). (C)- Both cash flows you have just written down are negative. This is an “All cost Alternatives” problem. Explain how you compare the value of choosing one alternative over the other. Which alternative does your “gut instinct” tell you is best? (d)- Get the incremental cost or earnings from choosing your favorite alternative from problem c by starting at time 0 and going month by month subtracting the cost of the “other choice” from the one you preferred in c. Draw this cash flow.

3. Cont. (f)- Calculate the Net Present Value of this cash flow at 6% annual interest assuming this problem has monthly compounding. Is the IRR greater or less than 6%? (Hint - remember that interest rates are reported on an annual basis but the compounding period is often - like right now - less than a year. You need to get a monthly interest rate for this problem). (g)- Keep trying different interest rates on the problem until you get one that gives an NPV of almost 0. Report this value as the IRR. (g)- What investments can you think of that produces better rates of return than choosing your favorite alternative from c over “the other one”. (Note- if your rate of return is negative - you may have picked the wrong favorite - try reversing your favorite). Do you believe your favorite choose is cost effective enough to “do it”? Why?