Project Introduction:
This project allows you to think seriously and apply decision-making management methods. In this project, you require to solve a bond portfolio problem, a diversified portfolio problem and a cash flow problem. The tasks in the project pertain to the concepts of Time Value Money, Financial Return Risk and Capital Budgeting Analysis. Diligent assessment of such concepts by the business heads can make sure the long-term survival of a business. If you play any role in the finance or are in pursuit of one, the project learning will help you to relate with the real-time requirements of the business.
Task 1:
a) You own a two-bond portfolio. Each has a par value of $1,000. Bond A matures in 5 years, has a coupon rate of 8 %, and has an annual yield to maturity of 9.20 percent. Bond B matures in 15 years, has a coupon rate of 8 % and has an annual yield to maturity of 9.20 %. Both bonds pay interest semi-annually.
What is the value of your portfolio? What occurs to the value of your portfolio if each yield to maturity rises by one percentage point?
b) Instead of own a five-year bond and a 15-year bond, assume you sell both of them and invest in two 10-year bonds. Each has a coupon rate of 8 % (semi-annual coupons) and has a yield to maturity of 9.20 %. Determine the value of your portfolio? What happens to the value of your portfolio if the yield to maturity on the bonds rises by one percentage point?
c) Based on your answers to (a) and (b), assess the price changes between the two portfolios. Were the price changes the same? Why or why not?
Task 2:
Annual savings from Project X comprise a reduction of ten clerical employees with annual salaries of $15,000 each, $8,000 from reduced production delays, $12,000 from lost sales due to inventory stock-outs, and $3,000 in reduced utility costs. Project X costs $250,000 and will be depreciated over a 5-year period by using straight-line depreciation. Incremental expenses of the system comprise two new operators with annual salaries of $40,000 each and operating expenses of $12,000 per year. The firms’ tax rate is 34 percent.
a) Determine Project X’s initial cash outlay.
b) Find out the project’s operating cash flows over the 5-year period.
c) If the project’s required return is 12 percent, must it be implemented?