Question
a) Dolphin Industries is closing down an outmoded factory which will make all the workers redundant. Dolphin's CEO is enraged to learn that the firm must continue to pay for workers' health insurance for 4 years. The cost per worker next year will be £2,400. The inflation rate is expected to be 4% per year and the health costs are expected to increase 3 percentage points faster than inflation. The nominal discount rate is 10%. What is the present value of this obligation?
b) A regional supermarket chain is deciding whether to install a fully automated bakery in each of its stores. Each bakery will cost £25,000 to install. Projected income per bakery is as follows
Why would the store continue to operate the bakery in years 4 and 5 if it produces no profits? What are the cash flows from investing in bakery? Assume each bakery is completely depreciated and has no salvage value at the end of its 5-year life.
c) A 6 year government bond (with a face value of £100) makes annual coupon payments of 5% and offers a yield to maturity of 3% annually compounded. Suppose that one year from now the bond still yields 3%. If you buy the bond today and sell it after one year, what is the return on your investment over the 12 month period?