Question 1) Continuous Compounding: Compute the future value of $1,900 continuously compounded for:
a: 5 years at a stated annual interest rate of 12 percent.
b. 3 years at a stated annual interest rate of 10 percent.
c. 10 years at a stated annual interest rate of 5 percent.
d. 8 years at a stated annual interest rate of 7 percent.
Question 2) NPV versus IRR: Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation (BRC). Both projects require an annual return of 14 percent.
|
Year
|
Deepwater Fishing
|
New Submarine Ride
|
|
0
|
-$750,000.00
|
-$2,100,000.00
|
|
1
|
310.00
|
1,2000,000.00
|
|
2
|
430,000.00
|
760,000.00
|
|
3
|
330,000.00
|
850,000.00
|
As a financial analyst for BRC, you are asked the following questions:
a. If your decision rule is to accept the project with the greater IRR, which project should you choose?
b. Because you are fully aware of the IRR rule's scale problem, you calculate the incremental IRR for the cash flows. Based on your computation, which project should you choose?
c. To be prudent, you compute the NPV for both projects. Which project should you choose? Is it consistent with the incremental IRR rule?
Question 3) Calculating Project NPV: The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 34 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project.
|
|
Year 0
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
|
Investment
|
$16,000.00
|
|
|
|
|
|
Sales revenue
|
|
$8,500.00
|
$9,000.00
|
$9,500.00
|
$7,000.00
|
|
Operating costs
|
|
1,900.00
|
2,000.00
|
2,200.00
|
1,700.00
|
|
Depreciation
|
|
4,000.00
|
4,000.00
|
4,000.00
|
4,000.00
|
|
Net working capital spending
|
200.00
|
250.00
|
300.00
|
200.00
|
?
|
a. Compute the incremental net income of the investment for each year.
b. Compute the incremental cash flows of the investment for each year.
c. Suppose the appropriate discount rate is 12 percent. What is the NPV of the project?
Question 4) Bond Yields: Pembroke Co. wants to issue new 20-year bonds for some much needed expansion projects. The company currently has 10 percent coupon bonds on the market that sell for $1,063, make semiannual payments, and mature in 20 years. what coupon rate should the company set on its new bonds if it wants them to sell at par?
Question 5) Accrued Interest: You purchase a bond with an invoice price of $1,090.00. The bond has a coupon rate of 8.4 percent, and there are 2 months to the next semiannual coupon date. What is the clean price of the bond?