A large company needs to finance a ten-year project recently approved by its board of directors. The
Question:
A large company needs to finance a ten-year project recently approved by its board of directors. The estimated cash flow for this project is the following (in millions of dollars).
Year Cash
1 -$40
2 -$20
3 -$5
4 -$10 5 6 7 8 9 10
The company has a capital of $10 million to invest three types of loans. $10 -$7 $20 $20 $30 $40 on this project and can finance the rest through Loan Long-term Medium-term Short-term Term 10 years 5 years 1 year Year when loan can be taken 1 1 and 6 1 to 10 Interest rate 3% 5% 8% Limit (in millions) $50 $10 Any money left after the end of a year can be put in a money market account that gives a 0.5% of interest per year. All cashflows occur at the beginning of the year. All loans are available to meet any cash obligations in the year when the loan is taken. For instance, a 5-year loan taken on year 1 must be paid back in year 6. The company would like to determine the optimal way of financing this project.
a. What is the projected cash at the end of year 10 for a financing plan consisting of a long-term loan of $50 million in year 1, a medium-term loan of $25 million in year 1, and a medium-term loan of $30 million in year 6?
b. What is the projected cash at the end of year 10 for an optimal financing plan?
c. What is the net interest of the optimal financing plan for the project? The net interest is the interest paid for the loans minus any interest received from the money market account.