Question Description
Your firm wants to invest $5,000,000 in a new project. There are two projects available and investment can be made in only one of them. Cash flows are as follows. (Higher payoff in the last year is due to scrap value.)
|
Year |
Investment A |
Investment B |
|
0 |
-$5,000,000 |
-5,000,000 |
|
1 |
$1,500,000 |
$1,250,000 |
|
2 |
$1,500,000 |
$1,250,000 |
|
3 |
$1,500,000 |
$1,250,000 |
|
4 |
$1,500,000 |
$1,250,000 |
|
5 |
$1,500,000 |
$1,250,000 |
|
6 |
$1,500,000 |
$1,250,000 |
|
7 |
$2,000,000 |
$1,250,000 |
|
8 |
0 |
$1,600,000 |
State the problem, then valuate each of the two investments by payback period, modified payback period, IRR, NPV, and profitability index. Then justify which investment is better than the other. Assume that your firm's opportunity cost is 22%. Explain your work is detail and provide references.
b. A bond has 8 years till maturity, par value is $1,000, coupon rate is 6%, and is traded in the market for $900. In addition, assume that the bond may be called in 2 years at $1,150 payoff which is par + premium. What is the bond's current yield, YTM, and YTC? Suppose that investors' opportunity cost reduces to 5.5%, what will be the bond's trading value at that time? Show your work in detail, and provide peer six reviewed references. .
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