Question

A mining project has funding requirements over the next four years of $2 million, $4 million, $8 a million, and $5 million, respectively. Assume that all the money for a given year is required at the beginning of the year. The mining company plans to sell exactly enough long-term bonds to cover the project funding requirements and all of these bonds, regardless of when they are sold, must be paid off in the same distant future year. The cost of selling bonds for the next four years are projected to be 7%, 6%, 6.5% year after the project is complete and continues for 20 years, after which the bond is paid off. During the same period, the mine can earn 6%, 5.5%, and 4.5%, respectively, on its short-term deposits. What is the mining company's optimal strategy for selling bonds and depositing funds in short-term accounts in order to complete the mining project? (Note: you can ignore the time value of money.) 6, and 7.5%, respectively. Bond interest paid commences one

Answer 1