Managerial Finance: Cost of Debt and Production Cash Outflow

MANAGERIAL FINANCE 2 ASSIGNMENT 4
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Part A: Cost of Debt
Explanation:
The effective interest rate that a firm pays on its debts, such as bonds and loans, is known as the cost of debt. To calculate the cost of debt yield to maturity=C+FV-PVnFV+PV2 where C is the coupon payment, FV face value, PV is the present value, and n is the number of semi-annual (Easycalculation, 2022). Further, a Coupon payment is given by =couple of interest *face value2 for the semi-annual payment. Because the cost of debt is determined semi-annually in this situation, the number of payments is equal to the number of periods*2. Furthermore, because the present value (PV) is a future payment for annuities, the present value will be expressed as a negative.
Solutions:
Therefore, using the above formulas,
the coupon payment is given by =0.08*10002
Coupon of payments which will be applied for all calculations= $ 40
1 The yield of maturity =$40+1000-920401000+9202 (Formulas, 2022).
The yield to maturity (YTM)=0.05
To get the cost of debt we take yield to maturity and convert it to a percentage of 5%=0.05*100 (Formulas, 2022).
2 The yield of maturity =$40+1000-1000401000+10002
The yield to maturity=0.04
Cost of debt=4%=0.04*100
3 The yield of maturity =$40+1000-1080401000+10802
The yield to maturity=0.0365
Cost of debt=3.65%=0.0365*100
4 The yield of maturity =$40+1000-1173401000+11732
The yield to maturity=0.0328
Cost of debt=3.28%=0.0328*.100
Observation:
Finally, it is notable that when the price rises, the cost of debt. falls. Several factors might contribute to an increase in debt costs, depending on the lender's risk tolerance. A longer repayment term is one of them, because the longer a loan is outstanding, the more the consequences of the time value of money and opportunity costs become apparent. The higher the cost of debt, the riskier the borrower, because there is a greater probability of default and the lender not being repaid in full or in part. The cost of debt is reduced when a loan is secured, but unsecured debts have greater charges.
Part B: Comparing NPV and IRR
When faced with an investment opportunity, a company must determine if investing will result in net economic profits or losses. To do so, the company calculates the project's future cash flows by discounting them into present value amounts using a discount rate that reflects the project's cost of capital and risk. The internal rate of return (IRR) and net present value (NPV) is the most widely employed discounting rates in such situations. In most cases, net present value (NPV) is the difference between the present value of cash inflows and outflows over a given period. A project's dollar value is determined using this procedure. Because it gives a dollar return, the approach presents an outcome that forms the foundation for an investment decision under decision support (Gallant, et al., 2022). The method's main goal is to concentrate on project surpluses. When using NPV, the assumed rate of return for reinvesting intermediate cash flows is the firm's cost of capital.
The internal rate of return (IRR), on the other hand, is a formula for calculating the p...