Your municipality realized that it needs a new bridge. The engineering department of your municipality came up with a proposal that has the following project particulars. Your goal as a finance manager is to work with an investment bank to get financing/float an asset (the bridge) backed bond offering. Assume the discount rate used for all calculations 10%.

Year 0 spend $100 to build the bridge that takes about a year to complete.

Year 1 revenue (from toll) of $50 use 90% of cash flow (revenue) for bond payments.

Year 2 revenue $30 use 80% of cash flow for bond payments.

Year 3 revenue $20 use 70% of cash flow for bond payments.

Year 4 revenue $10 -- use 60% of cash flow for bond payments.

Year 5 through 10 revenue $10 -- use 50% of cash flow (revenue) for bond payments.

After year 10 you do not charge any toll free for the community that is the social responsibility.

Now answer the following questions:

Q1: Is it a good project ?

Q2: What percent of the project costs could be funded by the bond issuance?

Q3: Bond holders gets coupon payments they like the same coupon payments every year. Since the discount rate is10%, the issued bond coupon is 10% as well at the issue date. What would be the structure of the bond?

Q4: What if the community issues a zero coupon bond (ZCB) instead? What would be the payment to bond holders after 10 years?

Q5: What if the community issues a zero coupon bond (ZCB) of 2 years?