Project Assignment 2

1. To find whether Focus Drilling meet the cash payment requirements:

As the focal date is today. So,
The cash payment today is $300,000, PV1= $300,000

In the payment plan, 2nd payment is one year from the focal date, therefore,
PV2-
FV=$700,000 I=0.0225(0.045/2) n=2x1=2 times
PV2= 700,000 (1+0.0225)-2
PV2= $669,532.1047

In the payment plan, 3rd payment is two years from the focal date, therefore,
PV3-
FV=$800,000 I= 0.025(0.05/2) n=2x2=4 times
PV3= 800,000(1+0.025)-4
PV3= $724,760.5158

In the payment plan, 4th payment is four years from now, therefore,
PV4-
FV=$1,000,000 I=0.0275 (0.055/2) n=4x2=8 times
PV4= 1,000,000 (1+0.0275)-8
PV4= $804,906.3537

Total payments= PV1+PV2+PV3+PV4

= $2,499,198.974

Therefore, Focus Drilling can meet the cash payment requirements as they have $2.6
million and can make the 4 payments with this fund.

2. To find the difference between the cash allocation and the cash payments:
Over the 4- years, the 4 variable interest rates $2.6 million will be $3,167,809.85
43,167,809.85-$2,800,000=$367,809.85
Therefore, the difference between the cash allocation and the cash payment requirements is
$367,809.85.
3. To find whether Focus Drilling meet the cash payment requirements by investing with
the fixed five- year interest rate:
As the focal date is today. So,
PV1= $300,000

For 2nd payment- PV2

FV= $700,000 I= 0.0143 (0.052/4) n= 4x1=4 times
PV2= 700,000 (1+0.013)-4
PV2= $664,752.9275

For 3rd payment-PV3

FV= $800,000 I= 0.013(0.052/4) n= 4x2=8 times
PV3= 800,000(1+0.013)-8
PV3= $721,463.5993

For 4th payment-PV4

FV= $1,000,000 I= 0.013(0.054/4) n= 4x4=16 times
PV4= 1,000,000(1+0.013)-16
PV4= $813,296.4455

Total payments= PV1+PV2+PV3+PV4

= $2,499,512.97

Therefore, Focus Drilling can meet the cash payment requirements as they have$2.6
million and can make 4 payments with this fund.

4. To find the difference between the cash allocation and the cash payments:
Over the 4 years, the interest rates $2.6 million will be $3,196,866.3
$3,196,866.3-$2,800,000=$396,866.3

Therefore, the difference between the cash allocation and the cash payments is
$396,866.3.

5. The company should select the fixed rate (5.2% p.a.) investment strategy. This is because
the value of cash-in-hand is greater and cheap than the other investment strategy.
($396,866.3-$367,809.85= $29,056.45)

6. To find the equivalent value, 12 months from now:

PV=$2,600,000, I=0.013, n=4x1=4 times
FV=$2,600,000(1+0.013)4
=$2,737,859.323
 Therefore, the equivalent value, 12 months from now, of the cash available to fund the
expansion is $2,737,859.323

7. To find the total of the value of the required cash payments, 12 months from now:
PV1= $300,000
PV2, PV3 will be same as in part 3 above, that is, $664,752.9275 and $721,463.5993
respectively.
PV4 increased by 10% (as mentioned in the question) due to projected increase in the
construction costs.
So, $1,000,000 x 10%= $1,100,000($1,000,000+100,000)
Now, finding PV of $1,100,000, I=0.013, n=4x4=16 times
PV=$1,100,000(1+0.013)-16
=$894,626.0901

Therefore, the total of the value of the required cash payments is

$2,580,842.617(PV1+PV2+PV3+PV4)

8. To find the difference between the value of the funds available and the total present
value:
difference=$2,737,859.323-$2,580,842.617=$157,016.70

Therefore, the difference between the value of the funds available and the total present
value of the required payment is $157,016.70

9. To find the accumulated value of the difference:

FV=$2,737,859.323(1+0.013)16
=$3,366,373.16
Therefore, the accumulated value of the difference at the end of the expansion period is
$3,366,373.16.

10. According to my opinion, Focus Drilling Supplies the proposed expansion should be
delayed as it would benefit the company.
Benefit:
The interest earned on $2.6 million makes the total cost of the expansion cheaper even
after the increase in the final payment by 10% and delays the project in comparison to the
4-year strategy.
Risks:
Risk of delaying the expansion by 12 months could lead to more construction cost then
what is estimated. This could lead to greater expansion cost then the 4- year strategy.