QUESTION 4 (25 MARKS)

a. A new drill press is considered a possible new investment for Durr Corporation. It generates an expected return of RM2,000 per year for 5 years. Its expected purchase price (including installation) is RM7,129. What is the drill press project's expected internal rate of return (IRR)? Based on the answer, should Durr proceed with the investment if cost of capital is 9%?

b. Suppose a 10-year bond is issued with a coupon rate of 8 percent when the market rate of interest is also 8 percent and the future market rate rises to 9 percent:

i. What happens to the price of this bond?

ii. What happens to the bond's price if the market rate falls to 6 percent?

iii. Explain your answers in (i) and (ii)?