We need your input! As the CFO of IPS, you are responsible for managi

We
need your input!
As the CFO of IPS, you
are responsible for managi

We
need your input!
As the CFO of IPS, you
are responsible for managing the IPS employee pension fund. Like any pension
fund, yours has physical and financial assets, and liabilities. You must decide
how the pension fund money will be invested. Your decisions will affect the well-being
of your firm and its employees. As a successful fund manager, you know that an
understanding of the time value of money is key.
You urge your staff to
investigate the investment potential of a variety of financial products and
services including money markets, real estate, stocks, and insurance products.
Your goal is to realize the maximum benefit for your clients.
Since IPS is still a
relatively small company, you are also responsible for decisions on product
viability and financing. While your staff is investigating pension fund
investments, you get the following email message from the CEO.
Remember the
production analysis you did on the Android01? I need you to put together an
analysis of the suitability of the project. Crunch the numbers and give me an
idea of the value of the project. Thanks for your help!
You’ve barely had time
to think about what you’ve read when you get another message from the CEO.
Meant to ask you
about the cost of capital. If we do decide to move forward with the Android01
project, we’ll need to determine our best source of capital. As far as I can
tell, we have three options:

a loan from the bank
collaboration with another firm
liquidation of securities owned
by IPS

Compare the three
financing options and estimate NPVs and IRRs from the costs and expected cash
flows. Just include that in your analysis. Thanks again!
This project will
require you to determine the suitability of a candidate project using capital
budgeting techniques based on time value of money, and taking care to
distinguish between different forms of costs and revenues. You will determine
the long-term capital requirements needed to support the organization and
analyze different methods of financing.
Begin with Step 1:
Time Value of Money Calculations
When you submit your
project, your work will be evaluated using the competencies listed below. You
can use the list below to self-check your work before submission.

3.1 Identify numerical or
mathematical information that is relevant in a problem or situation.
3.2 Employ mathematical or
statistical operations and data analysis techniques to arrive at a correct
or optimal solution.
3.3 Analyze mathematical or
statistical information, or the results of quantitative inquiry and
manipulation of data.
3.4 Employ software
applications and analytic tools to analyze, visualize, and present data to
inform decision-making.
10.3 Determine optimal
financial decisions in pursuit of an organization’s goals.
10.4 Make strategic managerial
decisions for obtaining capital required for achieving organizational
goals.

When you submit your
project, your work will be evaluated using the competencies listed below. You
can use the list below to self-check your work before submission.

As the manager of the
pension fund, considering different investment options will help you make
better decisions for your company and your clients. Please respond to the
following questions, providing supporting data and showing your calculations.
Before starting your
calculations, review the following materials:

time value of money analysis
valuing perpetuities and
annuities
amortizing a loan

Question
1:If the pension plan
invests $95 million today in 10-year US Treasury bonds (riskless investment
with guaranteed return) at an interest rate of 3.5 percent a year, how much
will it have by the end of year 10?
Question
2:If the pension plan
needs to accumulate $14 million in 13 years, how much must it invest today in
an asset that pays an annual interest rate of 4 percent?
Question
3:How many years will it
take for $197 million to grow to be $554 million if it is invested in an
account with a quoted annual interest rate of 5 percent with monthly
compounding of interest?
Question
4:The pension plan also
invests in physical assets. It is considering the purchase of an office
building today with the expectation that the price will rise to $20 million at
the end of 10 years. Given the risk of this investment, there should be a yield
of 10 percent annually on this investment. The asking price for the lot is $12
million. What is the annual yield (internal rate of return) of the investment
if the purchase price is $12 million today and the sale price 10 years later is
$20 million? Should the pension plan buy the office building given its required
rate of return?
Question
5:The pension plan is
also considering investing $70 million of its cash today at a 3.5 percent
annual interest for five years with a commercial bank. The bank in return will
pay an annuity due at the beginning of year 6 for the next 15 years. How much
will the annual payments be from years 6 to 21, if the rate at which these
payments are discounted is also 3.5 percent?
Question
6:The pension plan is
about to take out a 10-year fixed-rate loan for the purchase of an information
management system for its operations. The terms of the loan specify an initial
principal balance (the amount borrowed) of $4 million and an APR of 3.75
percent. Payments will be made monthly. What will be the monthly payment? How
much of the first payment will be interest, and how much will be principal? Use
the Excel PMT function to provide the answers to these questions.
Submit your Time Value
of Money Report and Calculations to the dropbox below. Be sure to show your
calculations in Excel and provide a narrative analysis in PowerPoint. Your
narrative analysis should summarize the results of your analysis and make
recommendations for the benefit of the company.

Before you submit your
assignment, review the competencies below, which your instructor will use to
evaluate your work. A good practice would be to use each competency as a
self-check to confirm you have incorporated all of them in your work.

As the manager of the
pension fund, you are frequently targeted by software companies peddling
investment simulation software. You have finally narrowed down your choice to
two applications. You need to analyze the options by calculatingNPV, IRR and Payback Periodbased on their purchase price and savings to
your company over time. Your staff has prepared a cash-flow table to help you.
Year zero shows the purchase price of each application, and the figures listed
for years 1-3 represent the savings to the company in successive years.

Year

Application I

Application II

0 (today)

-$1.5 million

-$1 million

$0.8 million

$0.5 million

$0.7 million

$0.24 million

$0.3 million

$0.6 million

You are considering
three possible scenarios.
Question
7:If the payback period
is two years, which application should be selected?
Question
8:If the required rate
of return is 15 percent, which application should be selected?
Question
9:If the selection
criterion is IRR, which application should be selected?
Respond to the
questions 7, 8, and 9 above by submitting a single, integrated report that
shows your supporting data and calculations. Finally, provide a recommendation
and rationale for purchasing either Application I or Application II.
Submit your Basic
Capital Budget Analysis Report and Calculations to the dropbox below. Be sure
to show your calculations in Excel and provide a narrative analysis in
PowerPoint. Your narrative analysis should include your recommendation and
rationale for purchasing either Application I or Application II.

Another one of your
responsibilities as CFO is to determine the suitability of new and current
products. Your CEO has asked you to evaluate Android01. That task will require
you to combine data from your production analysis from Project 2 with data from
a consultant’s study that was done last year. Information provided by the
consultant is as follows:

initial investment: $120
million composed of $50 million for the plant and $70 million net working
capital (NWC)
yearly expenses from year 1 to
year 3: $30 million
yearly revenues from year 1 to
year 3: $0
yearly expenses from year 4 to
year 10: $55 million
yearly expected revenues from
year 4 to year 10: $95 million
yearly expenses from year 11 to
year 15: $60 million
yearly expected revenues from
year 11 to year 15: $105 million
Revenues will vary between $80
million (minimum) and $105 million (maximum) for years 4 to 10, and
between $90 million (minimum) and $110 million (maximum) for years 11 to
15.

This concludes the
information provided by the consultant.
You also have the
following information:

The asset beta of the project
is 1.5. The expected return to the market is 8 percent, and the market
risk premium is 5 percent.
Assume that both expenses and
revenues for a year occur at the end of the year. NWC pays the bills
during the year, but has to be replenished at the end of the year.
Android01 is expected to
cannibalize the sales of Processor01 while also reducing the variable
costs for the production of Processor01. From years 4 to 10, revenues are
expected to fall by $5M, whereas variable costs will go down by $1
million. Processor01 is to be phased out at the end of the 10th year.
At the end of the 15th year,
the plant will be scrapped for a salvage value of $10 million. NWC will be
recovered.

Question
10:Calculate the expected
cash flows from the Android01 project based on the information provided.
Question
11:Calculate the NPV for
a required rate of return of 6.5 percent. Also calculate the IRR and the
Payback Period.
Before starting your
calculations, review the following materials onNPV, IRR and Payback Period.
Submit your Cash Flow
Report and Calculations to the dropbox below. Be sure to show your calculations
in Excel and provide a narrative analysis in PowerPoint. Your narrative
analysis should summarize the results of your analysis and make recommendations
for the benefit of the company.

The firm decides to
raise $30 million by selling equity and debt. The investment bankers hired by
your firm contact potential investors and come back with the following numbers:

Debt that pays $1 million
coupons a year and $18 million maturity value after 10 years will sell for
$20 million.
Equity that pays expected
dividends of $1.2 million starting next year and growing at a rate of 3
percent per year thereafter sells for $10 million.

Question
12:Calculate the cost of
debt, equity, and the WACC.
Before starting your
calculations, review the following materials:

cost of capital and choice of
financing
equity, debt, and preferred
stock

Submit your Cost of
Debt Report and Calculations to the dropbox below. Be sure to show your
calculations in Excel and provide a narrative analysis in PowerPoint. Your
narrative analysis should summarize the results of your analysis and make
recommendations for the benefit of company.

Your firm has decided
to spin off Android01 and Processor01 as a separate firm. The owners of the new
firm will be equity holders and debt holders. After speaking with potential
investors, investment banks have identified two possible capital structures
(structure of equity and debt ownership):

Debt holders receive debt that pays them coupons of $2
million a year, and $30 million after 20 years (these are expected values
as the coupons and principal payments are not riskless, the debt buyers
realize the firms could default). They price the debt using a discount
rate of 4 percent. Equity holders receive expected dividends of $3 million
starting from year 5, and growing at a rate of 4 percent per year (a
growing perpetuity). They price the equity using a discount rate of 7.5
percent.
Debt holders receive debt that pays them coupons of $1
million a year, and $12 million after 20 years (these are expected values
as the coupons and principal payments are not riskless, the debt buyers
realize the firms could default). They price the debt using a discount
rate of 3.5 percent. Equity holders receive expected dividends of $3.9
million starting from year 5, and growing at a rate of 4.5 percent per
year (a growing perpetuity). They price the equity using a discount rate
of 7 percent.

Your firm receives all
the proceeds from the sale debt and equity.
Prepare a Capital
Budgeting and Cost of Capital report that answers the following Question 13.
Question
13:Which particular
capital structure should be chosen for the spin-off?
Before starting your
calculations, review the following materials:

cost of capital and choice of
financing
equity, debt, and preferred
stock

Submit your Capital
Budgeting and Cost of Capital Report to the dropbox below.

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