Question
Please show calculation in excel. You are advising a local municipal treasury on a bridge construction project. The project requires an upfront investment (at time/year
Please show calculation in excel.
You are advising a local municipal treasury on a bridge construction project. The project requires an upfront investment (at time/year 0) of $10M, with an additional investment in year 1 of $5M. The bridge will become operational two years from now, and will start generating toll revenue. Specifically, the bridge produces no cash flows in year 1, and produces a perpetual stream of cash flows of $1M per year in subsequent years. Assume that all cash flows are risk-free. The treasury is financing this project with a ten-year zero-coupon bond. The current term structure of risk-free interest rates is at at 2%. Assume that the treasury is able to finance this project at the risk-free interest rate. (a) What is the NPV of this project? (b) Suppose that the treasury wants to issue enough bonds to cover the present value of construction costs of this project. Let the face value of each bond be $1,000. What is the total number of bonds that need to be issued? (c) Compute the modified duration of the bond issued by the treasury. (d) Suppose the treasury goes ahead with your suggestion in (b) and starts the project. Right after its start (at time 0), the yield curve unexpectedly rises by 1% across all maturities. What is the resulting change in the NPV of the project, following the change in interest rates? (e) Using the duration-based approximation, what would be the change in the value of the outstanding bonds following a 1% rise in interest rates?
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