# FINANCE-This project allows you to think critically and apply decision-making management techniques.

Question

FN2640

Project

PROJECT DESCRIPTION

Project Introduction:

This project allows you to think critically and apply decision-making management techniques. In this project,

you need to solve a bond portfolio problem, a diversified portfolio problem, and a cash flow problem. The

tasks in the project pertain to the concepts of Time Value Money, Financial Return Risk, and Capital

Budgeting Analysis. Diligent evaluation of these concepts by the business heads can ensure the long-term

survival of a business. If you play any role in finance, or are in pursuit of one, the project learning will help you

relate with the real-time requirements of the business.

Course Objectives Tested:

1. Calculate the return on investments based on cash flow received over time

2. Develop a financial plan that meets the needs of the organization for cash

3. Prepare a budget

4. Evaluate the success of financial decisions

5. Compare and contrast different investments

6. Compare and contrast investments that mature at different times

PROJECT SUBMISSION PLAN

Description/Requirements of Project

Assessment Preparation Checklist:

Evaluation Criteria

Task 1:

Before attempting the assignment, you are required to review this

Did you accurately calculate the

week’s online lesson.

value of your portfolio with the

given and changed percentages?

Task 1:

Did you evaluate the price

a. You own a two-bond portfolio. Each has a par value of

$1,000. Bond A matures in five years, has a coupon rate

of 8 percent, and has an annual yield to maturity of 9.20

percent. Bond B matures in fifteen years, has a coupon

rate of 8 percent and has an annual yield to maturity of

9.20 percent. Both bonds pay interest semi-annually.

What is the value of your portfolio? What happens to the

1

changes between the two

portfolios and provide a rationale

for the explanation?

FN2640

Project

Description/Requirements of Project

Evaluation Criteria

value of your portfolio if each yield to maturity rises by

one percentage point?

b. Rather than own a five-year bond and a fifteen-year

bond, suppose you sell both of them and invest in two

ten-year bonds. Each has a coupon rate of 8 percent

(semi-annual coupons) and has a yield to maturity of 9.20

percent. What is the value of your portfolio? What

happens to the value of your portfolio if the yield to

maturity on the bonds rises by one percentage point?

c.

Based upon your answers to (a) and (b), evaluate the

price changes between the two portfolios. Were the price

changes the same? Why or why not?

Source textbook: Melicher, R. W., & Norton, E. A. (2011).

Introduction to finance: Markets, investments, and financial

management (14th ed.). Hoboken, NJ: John Wiley.

Task 2:

Task 2:

Construct a spreadsheet to replicate the analysis of the table.

Did you construct the

Click here to view the table. That is, assume that $10,000 is

spreadsheet replicating the

invested in a single asset that returns 7 percent annually for

analysis of the table?

twenty-five years and $2,000 is placed in five different

Did you accurately calculate

investments, earning returns of 100 percent, 0 percent, 5 percent,

return on the fifth asset?

10 percent, and 12 percent, respectively, over the twenty-year

Did you accurately calculate the

time frame. For each of the questions below, begin with the

value of the diversified portfolio if

original scenario presented in the table:

the first two investments are a

a. Experiment with the return on the fifth asset. How low can the

total loss?

return go and still have the diversified portfolio earn a higher

Did you create the table to show

return than the single-asset portfolio?

how sensitive the portfolio

b. What happens to the value of the diversified portfolio if the

returns to 1-percent-point

first two investments are both a total loss?

c.

change in the return of each of

Suppose the single-asset portfolio earns a return of 8 percent

the other three assets with the

annually. How does the return of the single-asset portfolio

assumption of asset 1 of the

2

FN2640

Project

Description/Requirements of Project

Evaluation Criteria

compare to that of the five-asset portfolio? How does it

diversified portfolio remains at

compare if the single-asset portfolio earns a 6 percent annual

total loss?

return?

d. Assume that Asset 1 of the diversified portfolio remains a

total loss (–100% return) and asset two earns no return.

Make a table showing how sensitive the portfolio returns are

to a 1-percentage-point change in the return of each of the

other three assets. That is, how is the diversified portfolio’s

value affected if the return on asset three is 4 percent or 6

Did you explain how two

portfolios differ in their sensitivity

to different returns on their

assets along with the

implications of choosing

between single asset portfolio

and a diversified portfolio?

percent? If the return on asset four is 9 percent or 11

percent? If the return on asset five is 11 percent? 13 percent?

How does the total portfolio value change if each of the three

asset’s returns are one percentage point lower than in the

table? If they are one percentage point higher?

e. Using the sensitivity analysis of (c) and (d), explain how the

two portfolios differ in their sensitivity to different returns on

their assets. What are the implications of this for choosing

between a single asset portfolio and a diversified portfolio?

Source textbook: Melicher, R. W., & Norton, E. A. (2011).

Introduction to finance: Markets, investments, and financial

management (14th ed.). Hoboken, NJ: John Wiley.

Task 3:

Task 3:

Annual savings from Project X include a reduction of ten clerical

Did you find the initial cash outlay

employees with annual salaries of $15,000 each, $8,000 from

of Project X?

reduced production delays, $12,000 from lost sales due to

Did you find the project’s

inventory stock-outs, and $3,000 in reduced utility costs. Project

operating cash flows over the

X costs $250,000 and will be depreciated over a five-year period

five-year period?

using straight-line depreciation. Incremental expenses of the

Did you evaluate whether the

system include two new operators with annual salaries of $40,000

operating cash flows should be

each and operating expenses of $12,000 per year. The firms’ tax

implemented if the project’s

rate is 34 percent.

requirement is 12 percent?

3

FN2640

Project

Description/Requirements of Project

a. Find Project X’s initial cash outlay.

b. Find the project’s operating cash flows over the five-year

period.

If the project’s required return is 12 percent, should it be

c.

implemented?

Submission Requirements:

Answer each problem in detail with a conclusion and results.

Submit your answer in a Microsoft Excel file, showing step-bystep solutions to all calculations.

Click here to access the worksheet for this assessment.

Source textbook: Melicher, R. W., & Norton, E. A. (2011).

Introduction to finance: Markets, investments, and financial

management (14th ed.). Hoboken, NJ: John Wiley.

Due: Week 6

Grading Weight: 25%

End of Project Description

4

Evaluation Criteria