Problem 1: Determinant of interest Rates. The real risk free rate is 2 %. Inflation is expected to be 3 % this year and 4% during the next 2 years. Assume that the maturity risk premium is zero.
a. What is the yield on 2 year Treasury securities? Round the answer to the nearest hundredth. ______%.
b. What is the yield on 3 year Treasury securities? Round the answer to the nearest hundredth.
Problem 2: Yield to Call and Realized Rates of Return. Nine years ago, Goodwyn and Wolf incorporated sold a 16 year bond with a 11% annual coupon rate and a 10% call premium. Today, G& W called the bonds. The bonds originally were sold at their face value of $1000. Compute the realize rate of return for investors who purchased the bonds when they were issued and who surrender them today in exchange for the call price. __%.
Problem 3: NPV Your division is considering two investment projects, each of which requires an up front expenditure of $23 million. You estimate that the investments will produce the following net cash flows:
|
Year
|
Project A
|
Project B
|
|
1
|
45000000
|
$20000000
|
|
2
|
10000000
|
10000000
|
|
3
|
20000000
|
6000000
|
What are the two projects net present value assuming the cost of capital is 10%.
a. Project A $____________
b. Project B $ ___________
What are the two projects net present values assuming the cost of capital is 5%.
c. Project A $ _____________________
d. Project B $ _______________
What are the two projects net present values, assuming the cost of capital is 15%
e Project A $ ________
f. Project B $ __________________________--
Problem 4: NPVs, IRRs and MIRRs for independent Projects Wdelman Engineering is considering including two pieces of equipment a truck and an overhead pulley system in this year’s capital budget. The projects are independent. The cash outlay for the truck is $17100 and that for the pulley system is $22430. Project A is the truck and Project B is the pulley. The firms cost of capital is 14%. After tax cash flows including depreciation are as follows:
|
Year
|
Truck
|
Pulley
|
|
1
|
$5100
|
$7500
|
|
2
|
5100
|
7500
|
|
3
|
5100
|
7500
|
|
4
|
5100
|
7500
|
|
5
|
5100
|
7500
|
Calculate IRR for each project.
a. Project A _____%
b. Project B___%
Calculate NPV for each project.
c. Project A ____%
d. Project B _____%
Calculate MRR for each project
e. Project A ____%
f. Project B ___%
Problem 5: NPV and IRR Analysis. After discovering a new gold vein in the Colorado Mountains, CTC Mining Corporation must decide whether to mine the deposit. The most cost effective method o mining gold is sulfuric acid extraction a process that results in environmental damage. To go ahead with the extraction CTC must spend $9000 for new mining equipment and pay $165000 for its installation. The gold mined will net the firm an estimated $350000 each year over the 5 year life of the vein. CTC’s cost of capital is 17%. For the purposes of this problem assume that the cash inflows occur at the end of the year.