Project evaluation and capital investment

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Reference no: EM131873130

Project Evaluation and Capital Investment

Volume: 52,000 units --- 57,000 units --- 61,000 units

Price: $4.50 per unit --- $4.25 per unit --- $3.85 per unit

Marginal Cost: $3.25 per unit --- $2.50 per unit --- $2.20 per unit

Expected Life of Project: 3 years

Fixed Costs: $14,000 per year

Capital requirement: $100,000 (90% depreciated over the 3-year span)

Market value of equipment in 3 years: $10,000

Charge to Net Working Capital: $30,000 (at t = 0, then recapture at t = 3)

Tax rate: 34%

Risk free rate (3-year): 2.5%

Total Market Return: 9.95%

Project Beta: 2.30

Project Debt/Equity Structure: 0.70

Cost of Debt (pretax): 5.5%

FIND:

1. Project Cash Flow (Use Cash Flow From Assets [CFFA]) in Year 1

2. Project Cash Flow (Use Cash Flow From Assets [CFFA]) in Year 2

3. Project Cash Flow (Use Cash Flow From Assets [CFFA]) in Year 3

4. Cost of Equity Capital

5. Project Discount Rate (Hurdle Rate à Use WACC at estimated capital structure))

6. NPV

7. IRR

8. Payback Period

9. Discounted Payback Period

10. Average Accounting Return

11. Profitability Index

12. Do you take this project?

Bond Valuation

13. An 8% 20-year $1,000 par bond pays its coupon annually. The market rate has risen to 10% and the bond has 10 years left to maturity. What should the price of this bond be?

14. You own an 11% $1,000 par bond pays its coupon twice each year. The market rate has dropped to 7% and the bond has 12 years left to maturity. You decide to sell the bond as you believe rates will be rising again, soon. What price should you get for this bond?

15. As the interest rates rise in the market, what happens to the value of existing bonds?

Reference no: EM131873130

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