As per the question provided, Get Rich Investment is to buy a 90 days original term bill which has a maturity date of 75 days. The bill has a face value of $ 1,5,00,000 and has a yield of 5%. The calculations for the bill are shown below:
Figure 1: (Image Showing Calculation of Purchase price)
Source: (Created by Author)
The purchase price of the bill as shown in the calculation above is $ 14,84,669.
2.
Figure 2: (Image Showing Calculation of Market Price)
Source: (Created by Author)
As per the requirement of the question, the market price of the bill is to be calculated which is shown in the table above. As per the case, Get Rich Investment ltd has hold the bills for a period of 45 days. The yield which is available for a holding period of 30 days is 4.50%and for a holding day period of 45 days the yield is 4.65%. The market value of the bill after a period of 45 days will be $ 14,91426 and the market price at the end of 30 days will be $ 14,94,463. The sacrifice of interest rate as shown in the above table comes to about $ 5,537. After adding the market price for a holding period of 45 days with the sacrifice of interest rate, the expected selling price of the bill can be calculated.
Figure 3: (Image Showing Calculation of Total Fund Raised)
Source: (Created by Author)
4.
Figure 4: (Image Showing Calculation of Bond Equivalent Rate)
Source: (Created by Author)
As per the requirement (b) of the question, the new effective annual will be 8% as the fair value of the bond and market value of the bond remains same at $ 1000. For such a purpose the bond equivalent rate also becomes zero percent.
5.
As per the question Westpac ltd is a commercial bank which is engaged in issuing preference shares for a fixed dividend. The expected rate of return for investors who are buying the preference shares is calculated to be 10.50% which is shown in the chart below:
Figure 6: (Image Showing Calculation of Maximum Market Price)
Source: (Created by Author)
In figure 6, requirement (b) of the question is shown in the above image which shows that the maximum market price which an individual expecting 7% return can earn is shown above which is $ 173.33.
Figure 8: (Image Showing Calculation of fair value of shares)
Source: (Created by Author)
As per the calculations, the shares are being traded at $ 30.25 which is below the fair value of the shares as shown in the table above. This signifies that the shares are coming at a cheaper rate and therefore the shares should be purchased. The investors should invest in the shares of the company as the company is currently trading below the fair value of the shares.
7.
Figure 9: (Image Showing Calculation of Net Present Value)
Source: (Created by Author)
As per the definition of net present value, it is the difference between the presented value of the discounted cash flow of the business and present value of initial investments or cash outflow of the business. In simple words, it is a technique which is used by businesses to determine the cash inflows which the business can expect in future from the project (Hu et al. 2013). NPV analysis is done by businesses to determine the financial feasibility of any particular project before investments are made in the project. In the above case the NPV analysis considers sale revenue cost of operations and depreciation expenses to determine the Net present value of the project. The net present value of the projects comes to about $ 35,216 which is a positive figure which means that the project is worth making investments.
The company should undertake the project as the NPV analysis shows a positive figure of $ 35,216 which is evident enough that the project will be generating revenues which will be more that the costs of initial investments which were undertaken by the company.
8.
Figure 10: (Image Showing Calculation of Net Incremental Cash flow)
Source: (Created by Author)
The company should invest in the project as the NPV of the project is in positive and moreover the IRR of the project is more than the required rate of return which clearly indicates that the project must be invested in (Rossi 2015). If the IRR is more than required rate of return means the project has the capability to generate revenues in spite of risks. Whereas if IRR is lower than required return rate than the risks of the projects are more and hence not worthwhile investing.
9.
Figure 11: (Image Showing Calculation of NPV)
Source: (Created by Author)
The Ear Surround will be preferred more on the basis of the NPV analysis as the losses earned is lower in this system.
Figure 12: (Image Showing Calculation of NPV and AEC)
Source: (Created by Author)
The Ear Surround will be preferred on the basis of NPV analysis of the same as given in the chart above.
References
Hu, Y., Li, X., Li, H. and Yan, J., 2013. Peak and off-peak operations of the air separation unit in oxy-coal combustion power generation systems. Applied energy, 112, pp.747-754.
Rossi, M., 2015. The use of capital budgeting techniques: an outlook from Italy. International Journal of Management Practice, 8(1), pp.43-56.
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