The initial outlay or cost is $1,000,000 for a four year project . The respectiv

Question

The initial outlay or cost is $1,000,000 for a four year project .  The respective future cash inflows for years one, two, three, and four are $500,000, $300,000, and $300,000.  What is the payback period without discounting cash flows?

A. About 2.50.  B.  About 2.67.  C.  About 3.67.  D. About 4.50

Ten years ago, Bacon Signs Inc. issued a 25-year, 8% annual coupon bonds with a $1,000 face value each.  Since then, interest rates in General have fallen and the yield to maturity on the Bacon bond is now 7%.  Given this information, what is the price today for a Bacon Signs, Inc. bond?

A.  1,000.  B.  1,116.54.  C.  1,091.08. D.  914.41

Explanation / Answer

Hi,

Please find the answer as follows:

The initial Investment of 1000000 will get recovered as follows:

500000 (Year 1)

300000 (Year 2)

and Balance 200000 between Year 2 and Year 3.

Payback Period = 2 + 200000/300000 = 2.67 Years

Option B is the correct answer.

Part B:

Nper = 15 (indicates the remaining maturity period)

Rate = 7% (YTM)

PMT = 1000*8% = 80 (indicates annual interest payment)

FV = 1000 (indicates the par value of the bond)

PV = ? (current price of the bond)

Current Value of the Bond = PV(Rate,Nper,PMT,FV) = PV(7%,15,80,1000) = 1091.08

Option C is the correct answer.

Thanks.

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