Pacific Marine Transport Corporation is considering the purchase of a new bulk carrier for $10 million. The forecasted revenues are $5.5 million a year and operating costs are $4 million. A major refit costing $2 million will be required after both the fifth and tenth years. After 15 years, the ship is expected to be sold for scrap at $1.5 million.

What is the NPV if the opportunity cost of capital is 8%? (10 points)

Should the company accept the purchase of the carrier? (5 points)

What is the IRR of this project (10 points)

What is the payback period (10 points)

Here are data on $1,000 par value bonds issued by Microsoft and GE Capital. Assume you are thinking about buying these bonds.

Microsoft

GE

Coupon

5,25%

4,25%

Years to Maturity

30

10

Required Return

6%

8%

Answer the following questions:

a) Assuming interest is paid annually, calculate the values of each of the bonds (10 points)

b) How would these values change if the coupon was paid semiannually (10 points)

c) Assume that the bonds with the coupon that is paid annually (point a) are selling for the following amounts:

Microsoft $1,100

GE Capital $1,030

What are the expected rates of return (YTM) for each bond? (10 points)

d) How would change the price of each bond if the required rate of return (current 6% for Microsoft and 8% for the GE Capital) increased by 2% (10 points). What will you deduce about the relationship between market interest rate and bond prices? (10 points).