This project allows you to think critically and apply decision-making management techniques. In this project, you need to solve a bond portfolio problem, a diversified portfolio problem, and a cash flow problem. The tasks in the project pertain to the concepts of Time Value Money, Financial Return Risk, and Capital Budgeting Analysis. Diligent evaluation of these concepts by the business heads can ensure the long-term survival of a business. If you play any role in finance, or are in pursuit of one, the project learning will help you relate with the real-time requirements of the business.

Task 1: a. You own a two-bond portfolio. Each has a par value of $1,000. Bond A matures in five years, has a coupon rate of 8 percent, and has an annual yield to maturity of 9.20 percent. Bond B matures in fifteen years, has a coupon rate of 8 percent and has an annual yield to maturity of 9.20 percent. Both bonds pay interest semi-annually. What is the value of your portfolio? What happens to the

Task 1: Did you accurately calculate the value of your portfolio with the given and changed percentages? Did you evaluate the price changes between the two portfolios and provide a rationale for the explanation?

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FN2640 Project

Description/Requirements of Project

Evaluation Criteria

value of your portfolio if each yield to maturity rises by

one percentage point?

Rather than own a five-year bond and a fifteen-year

bond, suppose you sell both of them and invest in two ten-year bonds. Each has a coupon rate of 8 percent (semi-annual coupons) and has a yield to maturity of 9.20 percent. What is the value of your portfolio? What happens to the value of your portfolio if the yield to maturity on the bonds rises by one percentage point?

Based upon your answers to (a) and (b), evaluate the price changes between the two portfolios. Were the price changes the same? Why or why not?

Construct a spreadsheet to replicate the analysis of the table. Click here to view the table. That is, assume that $10,000 is invested in a single asset that returns 7 percent annually for twenty-five years and $2,000 is placed in five different investments, earning returns of 100 percent, 0 percent, 5 percent, 10 percent, and 12 percent, respectively, over the twenty-year time frame. For each of the questions below, begin with the original scenario presented in the table: Experiment with the return on the fifth asset. How low can the return go and still have the diversified portfolio earn a higher return than the single-asset portfolio? What happens to the value of the diversified portfolio if the first two investments are both a total loss? Suppose the single-asset portfolio earns a return of 8 percent annually. How does the return of the single-asset portfolio	Task 2: Did you construct the spreadsheet replicating the analysis of the table? Did you accurately calculate return on the fifth asset? Did you accurately calculate the value of the diversified portfolio if the first two investments are a total loss? Did you create the table to show how sensitive the portfolio returns to 1-percent-point change in the return of each of the other three assets with the assumption of asset 1 of the

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Description/Requirements of Project	Evaluation Criteria
compare to that of the five-asset portfolio? How does it compare if the single-asset portfolio earns a 6 percent annual return? Assume that Asset 1 of the diversified portfolio remains a total loss (100% return) and asset two earns no return. Make a table showing how sensitive the portfolio returns are to a 1-percentage-point change in the return of each of the other three assets. That is, how is the diversified portfolios value affected if the return on asset three is 4 percent or 6 percent? If the return on asset four is 9 percent or 11 percent? If the return on asset five is 11 percent? 13 percent? How does the total portfolio value change if each of the three assets returns are one percentage point lower than in the table? If they are one percentage point higher? Using the sensitivity analysis of (c) and (d), explain how the two portfolios differ in their sensitivity to different returns on their assets. What are the implications of this for choosing between a single asset portfolio and a diversified portfolio.

Diversification Illustration (Invest $10,000 over 25 years)
Investment Strategy 1: Investment Strategy 2: All funds in one asset Invest Equally in five different assets
Number of assets	1	Number of assets	5
Initial investment	$10,000	Amount invested per asset	2000
Number of years	25	Number of years	25
Annual asset return	7%	5 asset returns (annual)
Total accumulation at the end of time frame: Total funds	$54,274.33		100%
		Asset 1 return
		Asset 2 return	0%
		Asset 3 return	5%
		Asset 4 return	10%
		Asset 5 return	12%
		Total accumulation at the end of time frame:
		Asset 1	$0.00
		Asset 2	$2,000
		Asset 3	$6,772.71
		Asset 4	$21,669.41
		Asset 5	$34,000.13
		Total funds	$64,442.25

Annual savings from Project X include a reduction of ten clerical employees with annual salaries of $15,000 each, $8,000 from reduced production delays, $12,000 from lost sales due to inventory stock-outs, and $3,000 in reduced utility costs. Project X costs $250,000 and will be depreciated over a five-year period using straight-line depreciation. Incremental expenses of the system include two new operators with annual salaries of $40,000 each and operating expenses of $12,000 per year. The firms tax rate is 34 percent.	Task 3: Did you find the initial cash outlay of Project X? Did you find the projects operating cash flows over the five-year period? Did you evaluate whether the operating cash flows should be implemented if the projects requirement is 12 percent?

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FN2640 Project

Description/Requirements of Project

Evaluation Criteria

Find Project Xs initial cash outlay.

Find the projects operating cash flows over the five-year

period.

If the projects required return is 12 percent, should it be

implemented?

Submission Requirements:

Answer each problem in detail with a conclusion and results.

Submit your answer in a Microsoft Excel file, showing step-by- step solutions to all calculations.

Question:
Annual savings from Project X include a reduction in ten clerical employees with annual salaries of $15,000 each, $8,000 from reduced production delays, $12,000 from lost sales due to inventory stock-outs, and $3,000 in reduced utility costs. Project X costs $250,000 and will be depreciated over a five-year period using straight-line depreciation. Incremental expenses of the system include two new operators with annual salaries of $40,000 each and operating expenses of $12,000 per year. The firm tax rate is 34 percent.
a.	Find Project X's initial cash outlay.
b.	Find the project's operating cash flows over the five-year period.
	Cash Flow:
	Benefits:
	Sales increase:	Reduced lost sales from stockouts
	cost reduction:	Salary reduction
		Reduced production delay
		Reduction in utility cost
	Change in earnings before depreciation:
		change in sales + cost reductions
	Depreciation expense
	Benefits from the project:
		change in sales + cost reductions
	- depreciation
	Costs increases:
		Annual salary
		Operating expense
		Increase in costs
	Earnings before taxes: (benefits less cost increases)
	Less: taxes
	Earnings after taxes
	Annual cash flows = net income + depreciation =
c.	If the project's required return is 12%, should it be implemented?
			PV at
	Year	Cash flow	12%
	0
	1
	2
	3
	4
	5