Hello, I sent these questions earlier. Some of them were answered correctly some

Question

Hello, I sent these questions earlier. Some of them were answered correctly some not. The first set of questions were from this data:

Suppose an investor has $100 with him today. There is a 5% chance that he will fall sick after 1 year and then need this cash to pay for his healthcare expenses. He has two investment choices: A and B. A is a liquid investment that gives 2% annual return. If the investment continues from year 1 to 2, the investor keeps getting this 2% return. B is illiquid, and it must remain invested for two years. If investment B is liquidated at year 1, it loses 20% of principal amount, but if it stays in the investment, then it gives a one-time 20% return (i.e. gives $120) after two years.

Please answer the following questions based on this information. Only numbers, rounded to two decimal places when applicable, are necessary. And, the questions that were provided with wrong answers are: 1-) What is the expected cash flow at time 1 from investment A? The answer is not $102 0r $7 which were provided by Anonymous. 2-) What is the expected cash flow at time 1 from investment B? The answer is not %80 or $4, which were provided by Anonymous. 3-) What is the minimum return (i.e., total cash flow at time 2) that investment B must give at time 2 in order to make it a zero-NPV project? The answer is not $106.05.

The second set of questions were from this data(Again all answers were provided by Anonymous):

Suppose a bank pools the money of two investors (A and B), each contributing $100. There is a 5% chance that either one of the investors needs cash after year 1. The probability that they need cash after year 1 is independent of each other. Otherwise, they will need money at year 2. The bank keeps $100 in cash that earns zero interest rate, and it lends the remaining $100 to a borrower who promises to pay $120 at time 2. Assume there is no default risk with the borrower. However, if the borrower's project gets liquidated at year 1, the project gets only $40 back (called liquidation value) at year 1.

Please answer the following questions based on this information. Only numbers, rounded to two decimal places when applicable, are necessary.

1-)What is the probability (in %) that only A needs money at year 1? The provided answer was 2.5%. It says wrong. 2-) What is the probability (in %) that only B needs money at year 1? The provided answer was 2.5%. It says wrong 3-) What is the probability (in %) that no one needs money at year 1? The answer 95% says wrong. 4-) What is the probability (in %) that both need money at year 1? The answer was 5% and it is wrong. 5-) What is the expected cash flow to both investors combined at time 1? The answer was 9.5 but it was wrong. 6-) What is the expected cash flow to both investors combined at time 2? The answer was $151.25 and it says wrong. 7-) Assuming a discount rate of 5%, what is the NPV of these cash flows? The answer that provided was $53.76 and it says wrong. 8-) What is the minimum payoff in year 2 that the borrower would have to promise to pay in order to make this a zero-NPV project to the bank? The given answer was 59.275 and it says wrong.

Explanation / Answer

Answer to the second set of questions:

1) Since the probability of both the investors needing cash is independent to each-other, the probability that only A needs money at year 1 is 5% (i.e. equal to the probability).

2) Same as above.

3) The probability of no-one needing money is 90%.
Probability of no-one needing money = 100% - Probability of A needing money - Probability of B needing money => 100% - 5% - 5% = 90%

4) The probability of both needing money is 10%.
Probability of both needing money = Probability of A needing money + Probability of B needing money => 5% + 5% = 10%

Chegg policy allows us to answer only one question with its upto 4 sub-parts, which is answered here. Hence, I request you to kindly post remaining questions in a separate post.

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