Finance (Principles) Essay Example | Topics and Well Written Essays - 1750 words

Finance (Principles) - Essay Example Jack wishes to have the exact same amount of monies available at the end of the 12 months as his friend Sandra. Thus Jack is aware he must re-invest the principal and any interest earned at the expiry of the 9-month term deposit. Jack should re-invest his money in the next three months at 0.47% interest rate per month, or at 5.6% interest per annum, in order to make his investment equal to that of Sandra at the end of 12 months. You plan to borrow $380,000 from ANZ Bank to fund an investment opportunity. The Bank offers you a reduction in principal loan (in this type of loan repayments comprise principal plus interest) with a nominal interest rate (APR) of 6.8% compounded monthly over a 12-year period. This is a typical type of business loan where the bank negotiates a loan with the customer based upon a given period (in this case payments are based on a 12-year term) BUT in this particular type of loan the Bank requires you to repay the loan balance in full earlier than 12 years (BEFORE MATURITY) - unless you re-negotiate a new loan with them. You have $100,000 at your disposal today. You wish to endow a college scholarship. You structure the scholarship so that, beginning today, it will pay out the same amount of money per year forever. The endowment discount rate is 7%. Dreamliner Airline is considering investing in several new aircraft. The initial investment will cost them $675 million. The investment is expected to produce revenue of $118 million per year over the next 25 years. The cost of running the new planes is $23 million per annum over the 25-year period. c) Using the WACC you calculated in Q5 (you will not be able to answer this question until you complete Q5!) and following the IRR investment rule, should Dreamliner Airline take on the investment opportunity to buy the new planes? Explain why or why not? (4 MARKS) d) Theory suggests the WACC calculation is simply an estimated figure for the cost of capital.