Suppose that a project has the following costs: Time Cost 1 45,000 5 45,000 9 45,000...

  
 

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Suppose that a project has the following costs: Time Cost 1 45,000 5 45,000 9 45,000 13 45,000 The project will generate revenue of $40,000 at time t-3, and then SY at time 5, and then $Z at either time t = 7 or time t = 20. The project can be planned to receive the revenue of SZ at either t = 7 or t=20 (as well as receiving the revenue of $40,000 at time t = 3, and SY at time 5). Suppose you are a consultant who is paid to give financial advice to the project manager of the above project. The relevant interest rate for this project is 5.5% per annum (effective). (a) What is more likely to provide immunisation within this project - having SZ paid at t-7, or t = 20? Give reasons for your answer. (2 marks) (b) Determine appropriate values for Y and Z, that enables immunisation to occur on this project. Show all working that proves whether immunisation occurs or not (according to the three conditions required for immunisation). State clearly whether Z is received at t = 7 or t = 20. (10 marks) (c) Suppose your answer to (b) above was that the project can be immunised. The project manager thanks you for your advice, and says "great, now that the project has its cashflows immunised I can tell all the investors in the project that their money is safe and that the NPV will be maximised". What are the most relevant and important things you should say in response to this? (6 marks) Suppose that a project has the following costs: Time Cost 1 45,000 5 45,000 9 45,000 13 45,000 The project will generate revenue of $40,000 at time t-3, and then SY at time 5, and then $Z at either time t = 7 or time t = 20. The project can be planned to receive the revenue of SZ at either t = 7 or t=20 (as well as receiving the revenue of $40,000 at time t = 3, and SY at time 5). Suppose you are a consultant who is paid to give financial advice to the project manager of the above project. The relevant interest rate for this project is 5.5% per annum (effective). (a) What is more likely to provide immunisation within this project - having SZ paid at t-7, or t = 20? Give reasons for your answer. (2 marks) (b) Determine appropriate values for Y and Z, that enables immunisation to occur on this project. Show all working that proves whether immunisation occurs or not (according to the three conditions required for immunisation). State clearly whether Z is received at t = 7 or t = 20. (10 marks) (c) Suppose your answer to (b) above was that the project can be immunised. The project manager thanks you for your advice, and says "great, now that the project has its cashflows immunised I can tell all the investors in the project that their money is safe and that the NPV will be maximised". What are the most relevant and important things you should say in response to this? (6 marks)

Answer rating: 100% (QA)

a Given that the interest rate is 55 per annum it is more likely that the project will be immunised ... View the full answer