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5. Margaret buys $1000 in corporate junk bonds with a nominal interest rate of 13% that pays the coupon annually (you hope). If she can reinvest at the same rate without transaction costs what will her investment have grown to after 15 years? PART B: -- 75% of the grade of this problem sheet Answer all three (3) questions. They all carry equal marks. 1. You have the opportunity of investing in 3 projects each with the same initial outlay but differing cash flows. Calculate the NPV and IRR rankings. Period Project Project B Project C $ 0 (5,000) (5,000) (5,000) 1 900 200 2,000 2 900 800 2,000 3 900 900 2,000 4 900 1,000 1,000 5 400 1,100 6 900 1.200 7 900 1.300 B 900 1,400 9 900 1,500 10 900 1,600 2. A firm is considering four projects that are expected to produce cash flows as shown below. Year 0 1 2 3 4 5 6 Pret A Pre Phot Projet $ $ $ $ -31,000 -60,000 -25,000-40.000 6,000 20,000 30,000 6,000 20,000 25.000 6,000 40,000 6.000 10,000 8.000 6,000 6.000 6.000 6.000 80,000 9 10 6.000 Your cost of capital is 12% but you have a capital rationing constraint of $120,000. Assuming they are independent of each other and infinitely divisible calculate the NPV's of each and your choice of projects with the overall NPV of the combined projects you have selected. 3. As finance director you have been asked to compare two possible investment projects, A and B with the following outlays and cash flows Year Pet Project s $ 0 (20.000) (25.000) 1 7.000 2.500 2 7.000 7.000 10,000 7.000 20,000 5.000 Using a cost of capital of 13% rank them using NPV, IRR, Payback and Discounted payback