Prob. 24 NPV Analysis and Prob. 10B Bonds

First

A

ssignment: Prepare appropriate NPV analysis for the NPV Problems attached

B

ELOW: Note: in addition to the calculations, be prepared to interpret or explain how calculations impact decisions.

alculate

NPV + Payback Year8

8

#	Analysis –	C	Points
NPV #1		NPV + Payback Year			8
NPV #2
NPV #3	NPV – for Lease Option v. Purchase Option

Second assignment: The following relates to information on

Bond

s:

BondABC

$100,000$100,000$100,000

12%12%

5 years5 years

Semi-AnnualSemi-Annual

12%

Z
Face Value				$100,000
State Rate				12%	0%
Term			5 years	3 years
Payable			Semi-Annual	N/A
Market Rate	10%	14%	20%

Requirements:

a. Determine the value/issuance price of Bonds A, B, C, Z (4 poimts each = 16 points)

b. Calculate the following Year 2 values for Bonds A and C (4 points each = 8 points each

• Interest Expense Yr 2
• Cash Flow Yr. 2
• Carrying Value of Bond at 12/31/X2

You can submit your response using:

Excel

Important INFORMATION: some work is done on the documents. I want you to edit on those documents (whatever is incorrect) and finish the problem. and explain how you got the answer for each. Both of these are done on excel.

CAPITAL BUDGETING – NPV #1
Jam is considering a 5 year project with involves the following:
▪ Initial investment in equipment of $540,000. Inventory and other working capital requirements of $20,000 are projected.
▪ Projected annual cash receipts on this project of $200,000
Copyright 2020 – Ruben Davila. No unauthorized distribution without express written consent.
▪
▪
Projected annual cash expenses of $40,000
Major repairs [non-capital] of $20,000 would be required in year 3
Copyright 2020 – Ruben Davila. No unauthorized distribution without express written consent.
▪
▪
The equipment is estimated to have a resale value of $25,000 at the conclusion of the project.
Jam’s cost of capital is 14%.
Required:
1. Calculate the NPV on this project.
2. Calculate the payback period on this project.
Copyright 2020 – Ruben Davila. No unauthorized distribution without express written consent.
CAPITAL BUDGETING – NPV #2
The Big Bad Texan Drilling Corp. owns drilling rights on a tract of land on which crude oil has been discovered. The BBTD
projects that the tract will allow drilling and recovery of crude for the next 4 years. They anticipate the following costs associated
with the project including the cost of restoring the land to a park-like atmosphere. Below are projected data associated with this
project:
Copyright 2020 – Ruben Davila. No unauthorized distribution without express written consent.
▪
▪
▪
▪
▪
▪
Annual cash receipts of $500,000.
Annual cash expenses of $300,000
Equipment requirements of $500,000. Some of this equipment will be sold for $20,000 at the conclusion of the lease.
The
remainder of the equipment will have no salvage value at the end of the project and will be abandoned, adding to the rustic parklike atmosphere of the property.
Inventory and supplies necessary to begin and maintain the project are $40,000.
The cost of restoring the land to a pristine park-like setting and convert the drilling equipment into monkey bars is projected to be
$100,000. [Assume this is not a capital expenditure.]
BBDC has a cost of capital of 15%.
Copyright 2020 – Ruben Davila. No unauthorized distribution without express written consent.
Required:
Evaluate this project for BBTD.
CAPITAL BUDGETING – NPV #3
Ruby Corp. is replacing some old equipment and are trying to decide whether or not to buy or lease the new equipment. The
equipment would be used over 5 years. Relevant information is as follows:
Lease Option: Ruby would enter a 5-year lease agreement with annual lease payments of $200,000 per year. The lease would
require a refundable deposit of $50,000. A significant advantage associated with the lease is that all operating, repair and
maintenance costs are covered by the lessor.
Purchase Option: Ruby would purchase the equipment by making an initial investment of $850,000. The equipment would be used
for 5 years at which it could be sold for an estimated $425,000. Annual operating costs associated with the equipment would be
$9,000. Estimated maintenance and repair costs would escalate over the 5 years. It is estimated that such costs would be $3,000 per
year for the first three years before increasing to $5,000 in year 4 and $10,000 in year 5.
Ruby has a cost of capital of 18%.
Required:
Evaluate wither or not Ruby should buy or lease the equipment.
NOW
0
Initial Investment
WC Requirements
Proj Annual Cash Receipts
Proj Annual Cash Expenses
Major Repairs
Equip Resale Value
Total $ Flows
14.0% PV Factor
Annual PV $
NPV
Payback
Explanation Here:
1
2
200,000
(40,000)
200,000
(40,000)
(540,000)
(20,000)
(560,000) 160,000 160,000
1
0.8772
(560,000) 140,352
(419,648)
(815)
(560,000) (400,000) (240,000)
3
200,000
(40,000)
(20,000)
4
5
200,000
(40,000)
20,000
200,000
(40,000)
25,000
140,000
160,000
205,000
–
–
–
(100,000)
60,000
NOW
0
1
500,000
(300,000)
2
3
500,000 500,000
(300,000) (300,000)
–
200,000
200,000
200,000
–
–
–
–
Annual Cash Reciepts
Annual Cash Expenses
Total $ Flows
PV Factor
Annual PV $
NPV
4
500,000
(300,000)
5
200,000
–
–
–
NOW
0
Total $ Flows
PV Factor
Annual PV $
NPV
1
2
3
–
–
–
–
–
–
–
–
4
5
–
–
–
–
Face value x stated rate/ 2 (semi-annual)
# of years x 2 (semi-annual)
Stated rate/ 2 (semi-annual)
PMT
N
Interest rate
Payment x 7.360
Present Value of Anuity
Period
Start of Year 2
1st Half of Year 2
2nd Half of Year 2
End of Year 2
Interest Rate
Total Interest Expesne Yr 2
Total Interest Expesne Yr 2
6,000
10 years
6% 7.360
44,160
Interest Expense PMT
5%
5000 6,000
5%
5000 6,000
5%
5000 6,000
5%
5000 6,000
Face Value
N
Interest rate
Face value x 0.5584
PRICE OF BOND
Carrying Value
100,000
100,000
100,000
100,000
100,000
Present Value of Single Amount
100,000
10 years
6%
55,840
0.5584
PMT
N
I
Present Value of Annuity
6,000
10 years
6%
7.360
44,160
PRICE OF BOND
Face Value
N
I
100,000
10 years
6%
Present Value of Single Amount
100,000
55,840
0.5584
PMT
N
I
Present Value of Annuity
BO