1) Let's say the company has been offered with two projects, Project A and Project B, where...
Question:
1) Let's say the company has been offered with two projects, Project A and Project B, where both projects A and B need initial investments of RM 40,000 and RM 12,000 respectively. Project A is expected to reap a yearly income of RM 10,000, RM 12,000, RM 14,000, RM 16,000 and RM 10,000 and Project B is expected to get a steady income of RM 4,000 annually throughout the five years. Using the Payback Period and Net Present Value capital budgeting techniques, decide which project should the management accept. Is the decision viable? Discuss.
2) Using the above selected project range of income flows and initial investments, and using the Present Value Annuity Table, find the estimated Internal Rate of Return (IRR) (as a basis to find the actual IRR for the chosen project). Use a PVIFA of 3.2258 and n = 5 years. You are required to do interpolation in order to get the exact rate of IRR by applying the following formula:
From your calculation, did the management make the right decision in (b) above? Discuss. You can elaborate your answer with facts and examples.
3) Let's assume that the company has decided to raise fund by issuing bonds and you are planning to invest in the company's bond that has an annual interest payment of 10%. If the maturity period is 12 years, calculate the value of the bond if it yields 5%, 10% and 15% respectively. How can you depict the relationship between the coupon rate, the yield, the par value and the bond's value? Elaborate. Your answer 5 should be as creative as possible. You can illustrate your answer with a table.