Part 3

Answer no 1

Based on the given circumstances, I do strongly believe that this is absolutely not an
acceptable practice whether in a covid 19 pandemic right now in the world or in a normal
situation. Leaking out confidential non-public information is not only illegal but also, it’s
a crime. Its imbalances the economy and increases the chances of raising capitalism and
eventually it creates crime, unemployment and so on. Bond ratings are important not only
for their role in informing investors, but also because they affect the interest rate that
companies and government agencies pay on their issued bonds.

The covid 19 pandemic is a great threat to public health. The whole world’s economy and
financial markets are declining. The people specifically the investors in the US are trying
to stay in a safe zone. They are looking forward to invest in a U.S treasury securities. But
recently eighteen trillion-dollar market was dysfunctional.

The treasury debt securities are the securities which are issued by the federal government
to raise fund, like bonds, bills and notes. It’s a most popular hedging tool to the investors
and they also use it as a benchmark of other lending forms. These treasury securities are
traded in the secondary market. Last year on average daily transaction was 600 billion
dollars.

The U.S treasury securities market is highly liquid so investors can buy and sell their
securities very informally, within short notice. Banks, insurance companies, asset
managers and other parties rely on these securities to meet their demand for cash. But in
March due to corona virus investors rushed out of securities and into cash. The symptoms
were prices became extremely volatile; sellers were not finding buyers at a reasonable
price. There were some other symptoms as well. Difficulty in executing transaction,
increasing transaction cost and so on. (Jeffrey Cheng, 2020)

Covid 19 pandemic made uncertainty means market expectations has been changed
rapidly and also increasing the price volatility. High leverage took place, certain
regulations has been changed and most commonly everyone is working from home. So,
all these factors have become a problem for a broader economy like U.S. as they are
struggling to maintain the flow in treasuries, their transacting abilities in other markets
are now limited. Fed has taken some initiatives to defend these problems, like repurchase
agreement, security purchases, easing regulations. These actions have a better result.

After considering the U.S bond market, I am strongly appreciating my given answer.
When confidential information goes to the unauthorized person or parties, there can be a
huge financial loss for the country, economy collapses. Considering the overall situation
 or even considering the normal situation this sort of action in not acceptable in the
perspective of U.S and for all of the countries.

Govt issues bond to raise funds that used to develop the country. Government is the most
trustworthy party in the economy so the chances of default is very low or even no.
Nevertheless, if someone meets privately with corporate personnel to get non-public
information that is used in bond rating and gives additional confidential information for
the money where, the U.S govt is trying their best to recover their losses, trying to defend
the economy based on the covid 19 pandemic for the betterment of the whole country as
well as for the whole world then, leaking this information will not only be unethical but
also illegal. A healthy financial practice should be followed to develop a country
economically.

Reference
Jeffrey Cheng, D. W. (2020, 5 1). BROOKINGS. Retrieved from How did COVID-19 disrupt the
market for U.S. Treasury debt?: https://www.brookings.edu/blog/up-
front/2020/05/01/how-did-covid-19-disrupt-the-market-for-u-s-treasury-debt/
Answer no 2
a) LED Project:
CF 0 = -$4,200,000; CO 1= $700,000; CO 2= $1,000,000; CO 3= $700,000; F02 = 5; I= 10

NPV LED = $287,473.37

Solar project:
CF 0 =−$ 500,000; C 01 =$60,000; F01 = 10; I= 10

NPV Solar = -$131,325.97

Because the NPV of LED project is positive, the company should undertake LED project.

b) Combined project:
NPV combined =NPV LED + NPV Solar

=$287,473.37 + ( -$131,325.97)
= $156,147.40
Even through NPV of the combined project is positive, the company should not take the
combined project. NPV of the LED project is $287,473.37. If the company undertakes combined
project, NPV decreases by -$131,325.97 (NPV of the Solar project). Hence, it should undertake
only the LED project and not the combined project.

c) If Diane agrees to combine the two projects into a single proposal, the company would
not be maximising its NPV. On the other hand, if she does not agree to combine the
projects, then David would not be able to favour, It would not be ethical for Diane to
accept David’s proposal of rolling two projects into one as this leads to reduction in the
overall NPV of the company. The company would be better off by accepting only the
LED project and rejecting the solar project which has negative NPV.

d) LED project,
CF
PV of CF =
(1+k )t
Where, k= 0.1t = years
Year CF PV of CF Cumulative
0 -4200000 -4200000 -4200000
1 700000 636363.636 -3563636.364
2 700000 578512.397 -2985124.967
3 700000 525920.361 -2459204.606
4 700000 478109.419 -1981094.187
5 1000000 620921.323 -1360173.864
6 700000 395131.683 -965041.113
7 700000 359210.683 -605830.43
8 700000 326555.167 -279275.363
9 700000 296868.333 17593.07
10 700000 269880.303

279275.363
Discounted payback = 5 +
296868.333
=5.94

Solar project:
CF
PV of CF = t
(1+k )
Where, k = 0.1t = years

Year CF PV of CF Cumulative
0 -500000 -500000 -500000
1 60000 54545.45455 -445454.5455
2 60000 49586.77686 -395867.7686
3 60000 45078.88805 -350788.8805
4 60000 40980.80732 -309808.0732
5 60000 37255.27938 -272552.7938
6 60000 33868.4358 -238684.358
7 60000 30789.48709 -207894.871
8 60000 27990.44281 -179904.4281
9 60000 25445.8571 -154458.571
10 60000 23132.59737 -131325.9737

David analysed a 10year horizon of the investment and its cash flow. Within this period it can be
seen that it is unable to predict the discounted payback within this 10years plus we don’t know
what is or might be the cash flow after 10 years. So as result, it is not possible to calculate the
discounted payback period.
Compare-Contrast part
Investment decision can be made using both the NPV and discount payback period. When the
NPV of one project is higher and it also has a lower discount payback period as well compared to
another project, the former project should be selected. When the results are compared with
answers from A, it can be seen that LED project has a higher NPV with a lower discount
payback period than Solar project. This means both the method provided the same decision.