The Drug-Free Center, a growing nonprofit, is currently considering the construction of a new wing to extend its treatment building. After consulting with a law firm that specializes in municipal bonds, the nonprofit has decided to issue a tax-exempt municipal bond, taking advantage of the potential lower financing costs. 

The initial consideration of the bond issue is $50 million, and the bond issuance cost is estimated to be $1 million, including all professional services of the bond counsel and financial adviser, in addition to the underwriting firm. The full term of the bond issue is twenty years, in consideration of the economic life of the facility before major renovation is needed. The interest rate is 6 percent, based on the market rate for tax-exempt municipal bonds for similar projects at the time. 

The city authority has agreed to issue the bond based on a signed inducement. You are the nonprofit's financial manager and are asked to create a bond structure and payment schedule that is efficient and feasible. You decide to consider a serial bond, with either a level debt service payment schedule or a level principal payment schedule, and you will base your decision on which one is more financially favorable, knowing that your cash flow can cover either of the schedules. 

Moreover, you are aware that the organization is growing, and based on the Drug-Free Center's capital improvement plan, you expect to need to finance new projects over the next ten years. 

How do you proceed, and what is your conclusion/recommendation?

Answer rating: 100% (QA)

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