R-Kraine Inc. is considering acquiring an existing project (with financial backing from the

government). The project is expected to have another 8 (full) years of economic life. The

projects year-end cash flows are as follows:

Years 14: $2m each year

Years 5-8: $500,000, $2m, $500,000 and $2m (respectively)

Suppose the relevant discount rate for the project could be estimated from the following cash

flows of an 8-year (fixed) coupon bond issued by R-Kraine a couple of months ago:

Current market price (per unit): $584,608.5676

Face value (per unit): $800,000

Yearly coupon payments: $72,000

a)

Calculate the YTM of the bond. [Hint: State clearly the relevant numerical formula and

then crunch out the answer using Excel program or financial calculator. The answer can

also be solved with a scientific calculator using a manual trial-and-error approach as the

YTM was set to be an integer.]

(4 marks)

b)

Determine the value of this project.

(5 marks)

c)

Based on the NPV decision rule, determine the highest acquisition price/cost that would

make this project worth to be acquired.

(2 marks)