Purchase Solution

# Project funding with bonds

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1. Aspen Tech is considering undertaking a \$69 million investment project with expected cash flows of \$8.2 million per year for 15 years, beginning at the end of the first year. (Assume the first \$8.2 million is received at the end of the first year, the second \$8.2 million at the end of the second year, etc.) Aspen Tech plans to finance this project by selling bonds with a 15 year maturity and semi-annual coupon payments. Aspen Tech's required rate of return on its investment project is 2 percentage points above the coupon rate on its bonds.

a. Would you advise Aspen Tech to undertake the project if today's yield to maturity on comparable bonds is 7%? Explain.

b. If Aspen Tech does indeed undertake the project, what will Aspen Tech's expected rate of return on the project equal? (You will need Excel to answer this question.) Please print the excel sheet to show your answer. Explain thoroughly how you arrived at your answer.

c. If Aspen Tech wants to increase it expected rate of return on the project what might you advise? Explain using NPV=Net Present Value. You may need to draw a time line

##### Solution Summary

This solution looks at project funding with bonds and expected rate of return of the project.

##### Solution Preview

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A.
Yield of maturity on comparable bond = 7%.
This is equivalent to a 3.5% coupon payment every six months.
The equivalent annual yield = (1 + 0.035)^2 - 1 = 7.12%.
The required rate of return on the investment project = 7.12% + 2% = 9.12%. [See ...

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