Question

1)A bond is currently priced at 10% of the face value. If it pays a coupon of $50 annually and mature in 5 years. What is the yield to maturity?

2) The clean Lake Investment Group wants to build a golf course with a clubhouse. It is estimated that the project will provide a net cash inflow of $94000 for the first year of operation and the cash flows are projected to grow at a rate of 3% per year forver. The golf course project requires an initial investment of $1470000. Calculate the NPV of the project assuming an opportunity cost of 12%

Answer 1

Part a:

YTM is the rate at which PV of Cash inflows are equal to Bond price when the bond is held till maturity.

YTM = Rate at which least +ve NPV + [ NPV at that Rate / Change in NPV due to 1% inc in disc rate ] * 1%
Assuming Face Value of Bond is $ 1000

Year	Cash Flow	PVF/[email protected]	PV of Cash Flows	PVF/[email protected]	PV of Cash Flows
1-5	$                  50.00	1.1106	$                          55.53	1.0992	$                       54.96
5	$             1,000.00	0.0449	$                          44.92	0.0437	$                       43.73
PV of Cash Inflows	$                        100.45		$                       98.69
PV of Cash Oiutflows	$                        100.00		$                     100.00
NPV	$                            0.45		$                        -1.31

YTM = Rate at which least +ve NPV + [ NPV at that rate / Change in NPV due to Inc of 1% in Int Rate ] * 1%

= 0.86 + [0.45 / 1.76 ] * 1%

= 0.86 + [0.25 ] * 1%

= 0.86 + [0.0025]

= 0.8625

YTM is 0.8625 i,e 86.25%

Part B:

NPV = PV of Cash Inflows - PV of Cash Outflows
If NPV > 0 , Project can be accepted
NPV = 0 , Indifference point. Project can be accepted/ Rejected.
NPV < 0 , Project will be rejected.

PV of Cash inflows = CF1 / [ Ke - g ]

= $ 94000 / [ 12% - 3% ]

= $ 94000 / 9%

= $ 1044444.44

NPV = 1044444.44 - 1470000

= - $ 425,555.56

Pls do rate, if the answer is correct and comment, if any further assistance is required.