1. King Fisher Aviation is considering an investment in a new technology for a d
ID: 2810484 • Letter: 1
Question
1. King Fisher Aviation is considering an investment in a new technology for a drone project with a price of $16 million. Their current technology has a book value of $5 million and a market value of $5 million. The new technology is expected to have a five (5) year life, and the old technology has three (3) years left in which it can be expected to be used. If the firm replaces the old technology with the new technology it expects to save $5.7 million in operating costs each year over the next four years. If the firm purchases the new technology, it will also need an investment of $300,000 in net working capital. The required return on the investment is 12 percent, and the tax rate is 39 percent.
What are the NPV and IRR of the decision to replace the old technology?
Fill in the values in the spreadsheet
2.
King Fisher Aviation is evaluating an investment project with the following case flows:
$6,000
$5,500
$7,000
$8,000
Discount rate 14 percent
What is the discounted payback period for these cash flows if the initial cost is 15,000? What if the initial cost is $12,000? What if the cost is $16,000?
Fill in the values in the spreadsheet.
3. King Fisher has issued a bond with the following characteristics:
Par $1,000
Time to maturity: 15 years
Coupon rate: 7 percent
Semiannual payments
Calculate the price of the bond if the YTM is:
8%
10%
12%
Fill in the values in the spreadsheet.
Explanation / Answer
Answer 1 :
PURCHASING NEW TECHNOLOGY
Initial Cash Outlay
Purchase new technology = -16,000,000
Net working capital = -300,000
Total = -1,900,000
Cash inflows
Operating expenses saved = 5,700,000
Depreciation = - 3,200,000
EBT = 2,500,000
Tax = 975,000
Net Income = 1,525,000
OCF = 4,725,000
NPV = -16,000,000 + 4,725,000 (PVIFA12%, 4) + 300,000 / 1.124
NPV = -1457869
KEEP OLD TECHNOLOGY
Initial Cash Outlay
Keep technology = - 5,000,000
Taxes = Nil
Total = -5,000,000
Cash inflows
Depreciation = 1,666,667
EBT = -1,666,667
Taxes = - 650,000
Net Income = -1,016,667
OCF = 650,000
NPV = -5,000,000 + 650,000 (PVIFA12%, 4)
NPV = -3025723
THUS PURCHASE NEW TECHNOLOGY
Answer 2:
Calculate the PV of cash flows by discounting them:
6000/((1.14)^1) = 5263.15
5500/((1.14)^2) = 4232.07
7000/((1.14)^3) = 4724.80
8000/((1.14)^4) = 4736.64
If Initial Cost is 15000, Payback period is 3.164 years
If Initial Cost is 12000, Payback period is 2.53 years
If Initial Cost is 16000, Payback period is 3.38 years
Answer 3:
Price of a bond is given by
Present Value of Interest Payments = c × F × (1 (1 + r)-t )/r + (F/(1 + r)t)
If YTM is 8%
Price of Bond = 7% * 1,000 * (1-(1+4%)-30) / 4% + 1000 / (1+4%)30 = 1518.76
If YTM is 10%
Price of Bond = 7% * 1,000 * (1-(1+5%)-30) / 5% + 1000 / (1+5%)30 = 1307.45
If YTM is 12%
Price of Bond = 7% * 1,000 * (1-(1+6%)-30) / 6% + 1000 / (1+6%)30 = 1137.65
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