Question No 1

Part A:

Catherine Mouzy cannot decide between two machines that manufacture umbrellas. Both machines cost $100,000 and can produce 10,000 umbrellas annually (the umbrellas can be sold for $4 each). Machine A can be depreciated straight-line method to a salvage value of zero in 10 years, and the annual expense of producing 10,000 umbrellas is $13,350. Machine B can be depreciated straight-line method to a salvage value of $90,000 in 10 years, and the annual expense of producing 10,000 umbrellas is 15,650. Ms. Mouzys corporation has a marginal tax rate of 25%.

i) Find the NPV of each machine if the relevant discount rate is 10%. If Mouzy uses the NPV method to rank the machines, which will she choose?

II) Find the IRR of each machine. If Ms. Mouzy uses the IRR to rank the machines, which will she choose?

Part B:

1. If a bond has a duration of 5 and the yield increases from 7% to 8%, calculate the approximately percentage change in the bond price.
2. A bond has a duration of 7.2. If the yield decreases from 8.3% to 7.9%, calculate the approximately percentage change in bond price.
3. Adam Co. Limited has a 16% Term Finance Certificate (TFCs) outstanding that matures in twenty years. The TFC is callable in ten years at 116. It currently sells for 125 with par value of 100.

Calculate Current yield, Yield- to- call and Yield-to-maturity for this TFC.

4. If a bonds yield decreases by 0.1% and its price increase by 1.5%, calculate its duration.
5. A bond is currently trading at Rs.1,034.50, has a yield of 7.38%, and has a duration of 8.5. If the yield rises to 7.77%, calculate the new price of the bond.