Question

13. Lance Corp is choosing between two investment projects. Project one, or the introduction of another flavored chip line, has the present value of $500,000. The second project requires production of a new snack and will cost $300,000. The company estimated the following cash flows from project #2: $50,000 in year 1, $70,000 in year 2, and $300,000 in years three, four, five and six. Project 2 will require a cleaning expense of $50,000 in year 7. Interest rate is 7%.

a. Calculate the NPV of project 2

b. Explain in which project Lance Corp should invest

14. You just purchased a 30-year bond with 6% annual coupon, par value of $1000, and 17 years to maturity. The bond makes payments semi-annually and the interest rate in the market is 7.0%.

a. How much did you pay for the bond?

b. Is the bond trading below, at par, or above par?

c. Calculate current yield

d. The bond can be called in 6 years, starting June 1, 2026 at 117% of par. Calculate its yield to call

Answer 1

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