A yr examination question for a 2nd year finance student at a University.

You are the financial analyst for a large firm and is faced with a number of option as outline below.

You are required to complete a financial analysis and determine if the project is worth considering using a set of financial  ratios and data point as describe below.

Scenario

You currently have on the books US$3B worth of debt, which are due in 25 years on which you are paying 1% per annum.

Your creditor has made you an offer to discount the debt by 50% if you pay up today ie you only pay US$1.5b should you decide to take up the offer.

You do not have all that cash available so you decide to the go to the market and seek financing to determine if it would make financial sense to take up this offer.

The MARR for your firm is 8% 

. You could borrow the entire US$1.5 in two tranches as follows via bond issues.

  1. US $1.35b at a rate of 6.75% due 2028 or a 13 yr bond
  2. US$150m at a rate of 7.875% due 2045 or a 30 yr bond

Using the following economic analysis metrics would you recommend that you institution take up this offer.

  1. Net Present Value (NPV)
  2. Life Cycle Cost (LCC)
  3. Benefit to Cost Ratio(BCR)
  4. Internal rate of Return ( IRR)

This is UWI, UTECH and UCC challenge. I would  also welcome responses from any other University

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One Response

  1. No one has yet taken up the challenge. I sent this to a number of universities overseas, so let’s see how that plays out

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