Project Case: Accu Drilling Accu Drilling Supplies has been growing steadily and the company has decided to expand their facilities to meet the increased demand. Management allocated $3 million for this expansion but it has to decide between two expansion designs that have different payment plans and financing strategies. The Chief Finance Officer (CFO) of the company has predicted interest rates over the next four years to be as follows: 5% p.a. compounded semi-annually in Year 1, 5.5% p.a. compounded semi-annually in Year 2,5.5% p.a. compounded semi-annually in Year 3, and 6% p.a. compounded semi-annually in Year Design A Payment Plan: $500,000 now, $1,600,000 two years from now, and finally, $1,200,000 four years from now. Design B Payment Plan: $1,000,000 now, $800,000 a year from now, $500,000 two years from now, $700,000 three years from now, and $400,000 four years from now. Questions (total of 40 marks) Answer each of the following questions based on the Focus Drilling case, including any calculations and rationale used. 1. Can Accu Drilling meet the required cash payments in Design A? Use today as the focal date. (7 marks) 2. What is the future value of the remaining amount (surplus) for Design A at Year 4? (3 marks) 3. Can Accu Drilling meet the required cash payments in Design B? Use today as the focal date. 17 marks) 4. What is the future value of the remaining amount (surplus) for Design B at Year 4? (3 marks) Suppose that the CFO found an alternative financing option by investing the $3 million allocated for the project in an investment fund at a fixed rate of 6% compounded monthly for 4 years. 5. Can Accu Drilling meet the required cash payments in Design A with the new financing option (fixed interest rate)? Use today as the focal date. (7 marks) 6. Can Accu Drilling meet the required cash payments in Design B? Use today as the focal date. (7 marks) 7. Which design (A or B) AND financing option (variable or fixed) do you recommend? Explain. (6 marks) a. Design (A or B) b. Financing (variable or fixed) Project Case: Accu Drilling Accu Drilling Supplies has been growing steadily and the company has decided to expand their facilities to meet the increased demand. Management allocated $3 million for this expansion but it has to decide between two expansion designs that have different payment plans and financing strategies. The Chief Finance Officer (CFO) of the company has predicted interest rates over the next four years to be as follows: 5% p.a. compounded semi-annually in Year 1, 5.5% p.a. compounded semi-annually in Year 2,5.5% p.a. compounded semi-annually in Year 3, and 6% p.a. compounded semi-annually in Year Design A Payment Plan: $500,000 now, $1,600,000 two years from now, and finally, $1,200,000 four years from now. Design B Payment Plan: $1,000,000 now, $800,000 a year from now, $500,000 two years from now, $700,000 three years from now, and $400,000 four years from now. Questions (total of 40 marks) Answer each of the following questions based on the Focus Drilling case, including any calculations and rationale used. 1. Can Accu Drilling meet the required cash payments in Design A? Use today as the focal date. (7 marks) 2. What is the future value of the remaining amount (surplus) for Design A at Year 4? (3 marks) 3. Can Accu Drilling meet the required cash payments in Design B? Use today as the focal date. 17 marks) 4. What is the future value of the remaining amount (surplus) for Design B at Year 4? (3 marks) Suppose that the CFO found an alternative financing option by investing the $3 million allocated for the project in an investment fund at a fixed rate of 6% compounded monthly for 4 years. 5. Can Accu Drilling meet the required cash payments in Design A with the new financing option (fixed interest rate)? Use today as the focal date. (7 marks) 6. Can Accu Drilling meet the required cash payments in Design B? Use today as the focal date. (7 marks) 7. Which design (A or B) AND financing option (variable or fixed) do you recommend? Explain. (6 marks) a. Design (A or B) b. Financing (variable or fixed)
