Project Funding Assignment It is January 1, 2005. Director of Special Projects Rakesh Parameshwar has a planned
Question:
Project Funding Assignment
It is January 1, 2005. Director of Special Projects Rakesh Parameshwar has a planned $20.5 million project, which will require the following expected cash flows between 2005 and 2009:
| Date | Cash Requirement ($ millions) |
| 01-Jun-05 | 7.50 |
| 01-Jan-06 | 4.50 |
| 01-Jun-06 | 1.00 |
| 01-Jan-07 | 1.00 |
| 01-Jun-07 | 1.00 |
| 01-Jan-08 | 1.00 |
| 01-Jun-08 | 1.00 |
| 01-Jan-09 | 3.50 |
Rakesh turns to his Director of Financial Planning, Christine Reyling, and asks her to ensure that funding is available for the project. Christine is considering buying a portfolio of bonds, with cash flows from the bonds arranged to coincide with the needs of Rakeshs project. The following bonds are available, and can be purchased in any quantity:
| Maturity | 01-Jun-05 | 01-Jan-06 | 01-Jun-06 | 01-Jan-07 | 01-Jun-07 | 01-Jan-08 | 01-Jun-08 | 01-Jan-09 |
| Coupon | 7.00% | 7.50% | 6.75% | 0.00% | 10.00% | 9.00% | 10.25% | 10.00% |
| Price | 1.00 | 1.03 | 1.02 | 0.81 | 1.16 | 1.15 | 1.23 | 1.25 |
- What is the minimum cost portfolio of these bonds that will meet the projects requirements? Assume that any cash can be reinvested at an annual rate of 4%, and dont worry about discounting.
- What is the cost of capital over time for this project? In other words, if Rakesh decides he will need an additional dollar in June of 2007, what is the present value of that dollar? What is this present value for all relevant periods for the duration of the project?
- What is the implied yield for each of these periods? For example, if Rakesh needs an additional $1 million in June of 2007 and you conclude that the present value of this $1 million is $0.739 million, what is the implied rate of return on this $0.739 million that will be worth $1 million in June of 2007?
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