Operations Management

Corporate bond interest in terms of cost of capital A company can raise capital for a project or to cover other expenses, issuing bond in the market. Depending on the credit rating and other risk factors the company will have to offer coupon rate on the bond. A corporate can issue bond at a fixed bond rate, say 5%, par value of $1000, the corporate will have to pay the bondholder $50 as coupon payment. Bonds come with a maturity date too. It is usually few years. The coupon rate in most of the cases are fixed, but could be floating too. In case of a floating coupon rate the bond rate usually changes with US treasury or some other benchmark rate. The coupon rate the corporate offers is usually the cost of capital (Investopedia, n.d.). Corporate bonds usually yield higher than inflation and make good return on investment for investors. But the income from bonds are usually taxable. But from the corporate’s perspective the cost of capital will depend on the coupon rate it offers. Th

 Before we start the NPV calculation, here are the facts we are going to use – ·        The cost to install the required equipment will be $105,000, this is the outflow on year 0, this is a tangible long term asset, and we are going to depreciate it over 5 years in a straight line, so it will depreciate at the rate of $21000 every year until the book value becomes 0 ·        The gross revenues from the project will be $25,000 for year 1, then $27,000 for years 2 and 3. Year 4 will be $28,000 and year 5 (the last year of the project) will be $23,000·      ·        The estimated cash outflows are $13000 on year 1, $12000 on year 2 to 4 and on 5 th year $10000 ·        In 5 years, the equipment will stop working and can be sold for its parts for about $5,000. ·        The capital borrowing cost is 3% ·        Discount rate we will use to calculate NPV 7%  With these data we can calculate the net income from the project considering all cash inflows and cash outflows -