subject: corporate finance

Read the questions carefully and answer them. Your solutions must delineate how you reach the final answer.

Small Corp. is investigating a possible new project, project X, which would affect coporate cash flow as follows: Cash Flows without Project X in Year 0 1 2 3 4 5 150 175 185 185 195 200 Cash Flows with Project X in Year 0 1 2 3 4 5 110 180 200 205 210 215 Respond to (a) through (e). (a) What are the incremental cash flows associated with undertaking project X? (b) What is the net present value (NPV) of project X under a flat term structure of risk-free rate 8%, compounded annually, irrespective of maturity? (c) Under these assumptions, what is the hurdle rate? Without further calcualtion, determine whether the IRR for project X is higher or lower than the hurdle rate, using your answer in part (b). Now let Bt = price per $100 of face value of a zero coupon bond maturing at year t. If B1 = $94.00, B2 = $88.20, B3 = $81.50, BA = $76.00, and B5 = $73.00, implying that the term structure of interest rate is not flat. (d) Determine annualized) zero-coupon rates for year 1 through 5 to the nearest .01 percent. (e) What is the NPV of project X under the new term structure