Financial Questions

a. Your firm wants to invest $5,000,000 in a new project. There are two projects available and investment can be made in only one of them. Cash flows are as follows. (Higher payoff in the last year is due to scrap value.

Year Investment A Investment B

0 - $5,000,000 - $5,000,000

1 $1,500,000 $1,250,000

2 $1,500,000 $1,250,000

3 $1,500,000 $1,250,000

4 $1,500,000 $1,250,000

5 $1,500,000 $1,250,000

6 $1,500,000 $1,250,000

7 $2,000,000 $1,250,000

8 0 $1,600,000

State the problem, and then valuate each of the two investments by payback period, modified payback period, IRR, NPV, and profitability index. Then justify which investment is better than the other. Assume that your firm's opportunity cost is 22%. Explain your work is detail and provide references.

b. A bond has 8 years till maturity, par value is $1,000, coupon rate is 6%, and is traded in the market for $900. In addition, assume that the bond may be called in 2 years at $1,150 payoff which is par + premium. What is the bond's current yield, YTM, and YTC? Suppose that investors' opportunity cost reduces to 5.5%, what will be the bond's trading value at that time? Show your work in detail, and provide references.

c. You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago for $2.1 million in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based on a recent appraisal, the company believes it could sell the land for $2.3 million on an aftertax basis. In four years, the land could be sold for $2.4 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $125,000. An excerpt of the marketing report is as follows: BUS 550 Hybrid Syllabus 38 of 48 The zither industry will have a rapid expansion in the next four years. With the brand name recognition that PUTZ brings to bear, we feel that the company will be able to sell 3,600, 4,300, 5,200, and 3,900 units each year for the next four years, BUS 550 Hybrid Syllabus 39 of 48 respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $750 can be charged for each zither. Because zithers appear to be a fad, we feel at the end of the four-year period, sales should be discontinued. PUTZ believes that fixed costs for the project will be $415,000 per year, and variable costs are 15 percent of sales. The equipment necessary for production will cost $3.5 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $350,000. Net working capital of $125,000 will be required immediately. PUTZ has a 38 percent tax rate, and the required return on the project is 13 percent. What is the NPV of the project?

Note:

Also show the calculations in Excel or if you worked on the paper, then submit a picture of it.