fin 2640_project task 3
MermaidThis project allows you to think critically and apply decision-making management techniques. In this project, you need to solve a bond portfolio problem, a diversified portfolio problem, and a cash flow problem. The tasks in the project pertain to the concepts of Time Value Money, Financial Return Risk, and Capital Budgeting Analysis. Diligent evaluation of these concepts by the business heads can ensure the long-term survival of a business. If you play any role in finance, or are in pursuit of one, the project learning will help you relate with the real-time requirements of the business. Please see two attached files.. Project description and requirements in one with table to applied to complete task 2 and file for task 3.
Task 1 has no build in templates
Task 2 needs to build a template in the Excel file (as given in the word file)
Task 3 needs to be completed in Excel File
Task 1:
a. You own a two-bond portfolio. Each has a par value of
$1,000. Bond A matures in five years, has a coupon rate
of 8 percent, and has an annual yield to maturity of 9.20
percent. Bond B matures in fifteen years, has a coupon
rate of 8 percent and has an annual yield to maturity of
9.20 percent. Both bonds pay interest semi-annually.
What is the value of your portfolio? What happens to the value of your portfolio if each yield to maturity rises by
one percentage point?
b. Rather than own a five-year bond and a fifteen-year
bond, suppose you sell both of them and invest in two
ten-year bonds. Each has a coupon rate of 8 percent
(semi-annual coupons) and has a yield to maturity of 9.20
percent. What is the value of your portfolio? What
happens to the value of your portfolio if the yield to
maturity on the bonds rises by one percentage point?
c. Based upon your answers to (a) and (b), evaluate the
price changes between the two portfolios. Were the price
changes the same? Why or why not?
Task 2:
Construct a spreadsheet to replicate the analysis of the table.
See below to view the table. That is, assume that $10,000 is
invested in a single asset that returns 7 percent annually for
twenty-five years and $2,000 is placed in five different
investments, earning returns of 100 percent, 0 percent, 5 percent,
10 percent, and 12 percent, respectively, over the twenty-year
time frame. For each of the questions below, begin with the
original scenario presented in the table:
a. Experiment with the return on the fifth asset. How low can the
return go and still have the diversified portfolio earn a higher
return than the single-asset portfolio?
b. What happens to the value of the diversified portfolio if the
first two investments are both a total loss?
c. Suppose the single-asset portfolio earns a return of 8 percent
annually. How does the return of the single-asset portfoliocompare to that of the five-asset portfolio? How does it
compare if the single-asset portfolio earns a 6 percent annual
return?
d. Assume that Asset 1 of the diversified portfolio remains a
total loss (–100% return) and asset two earns no return.
Make a table showing how sensitive the portfolio returns are
to a 1-percentage-point change in the return of each of the
other three assets. That is, how is the diversified portfolio’s
value affected if the return on asset three is 4 percent or 6
percent? If the return on asset four is 9 percent or 11
percent? If the return on asset five is 11 percent?13 percent?
How does the total portfolio value change if each of the three
asset’s returns are one percentage point lower than in the
table? If they are one percentage point higher?
e. Using the sensitivity analysis of (c) and (d), explain how the
two portfolios differ in their sensitivity to different returns on
their assets. What are the implications of this for choosing
between a single asset portfolio and a diversified portfolio?
PLEASE SEE ATTACHED table below to complete task 2
Diversification Illustration (Invest $10,000 over 25 years) | |||||
Investment Strategy 1: All funds in one asset | Investment Strategy 2: Invest Equally in five different assets | ||||
Number of assets | 1 | Number of assets | 5 | ||
Initial investment | $10,000 | Amount invested per asset | 2000 | ||
Number of years | 25 | Number of years | 25 | ||
Annual asset return | 7% | 5 asset returns (annual) | |||
Total accumulation at the end of time frame: Total funds | $54,274.33 | −100% | |||
Asset 1 return | |||||
Asset 2 return | 0% | ||||
Asset 3 return | 5% | ||||
Asset 4 return | 10% | ||||
Asset 5 return | 12% | ||||
Total accumulation at the end of time frame: | |||||
Asset 1 | $0.00 | ||||
Asset 2 | $2,000 | ||||
Asset 3 | $6,772.71 | ||||
Asset 4 | $21,669.41 | ||||
Asset 5 | $34,000.13 | ||||
Total funds | $64,442.25 | ||||
Task 3:
Annual savings from Project X include a reduction of ten clerical
employees with annual salaries of $15,000 each, $8,000 from
reduced production delays, $12,000 from lost sales due to
inventory stock-outs, and $3,000 in reduced utility costs. Project
X costs $250,000 and will be depreciated over a five-year period
using straight-line depreciation. Incremental expenses of the
system include two new operators with annual salaries of $40,000
each and operating expenses of $12,000 per year. The firms’ tax
rate is 34 percent.a. Find Project X’s initial cash outlay.
b. Find the project’s operating cash flows over the five-year
period.
c. If the project’s required return is 12 percent, should it be
implemented?
PLEASE SEE ATTACHED FILE LABELED TASK 3 **must be completed in this file.
Submission Requirements:
Answer each problem in detail with a conclusion and results.
Submit your answer in a Microsoft Excel file, showing step-bystep solutions to all calculations.
- 9 years ago
Purchase the answer to view it
- project_3_solution.xls