3. Isabel is considering opening a new business. To start her business, she will have to borrowmoney at a real interest rate of 5% and will have expenses in developing the business forseveral years. She will then receive profits for several more years. The table below gives heryear by year cash flow in real dollars. Assume cash flows occur at the beginning of each year.Year1 2 3 4 5 6 78Cash flow -20 -10-56 58| 410(a) Find the net present value of the Isabel's business opportunity. Should Isabel make thisinvestment?(b) If Isabel makes this investment, how much money will she have at the end of year 8?Does this calculation change your opinion on whether Isabel should make the investment?Why or why not?(c) Would increasing the interest rate make Isabel more or less likely to open this business?Explain briefly.

Given, The cashflows of the business. The interest rate is 5%

Isabel is considering opening a new business. To start her business, she will have to borrow money at a real interest rate of 5% and will have expenses in developing the business for several years. She will then receive profits for several more years. The table below gives her year by year cash flow in real dollars. Assume cash flows occur at the beginning of each year. 6 7 Year 1 2 3 4 5 8. Cash flow -20 (a) Find the net present value of the Isabel's business opportunity. Should Isabel make this -10 -5 6 5 8. 4 10 investment? (b) If Isabel makes this investment, how much money will she have at the end of year 8? Does this calculation change your opinion on whether Isabel should make the investment? Why or why not? (c) Would increasing the interest rate make Isabel more or less likely to open this business?

Isabel is considering opening a new business. To start her business, she will have to borrow money at a real interest rate of 5% and will have expenses in developing the business for several years. She will then receive profits for several more years. The table below gives her year by year cash flow in real dollars. Assume cash flows occur at the beginning of each year. 6 7 Year 1 2 3 4 5 8. Cash flow -20 (a) Find the net present value of the Isabel's business opportunity. Should Isabel make this -10 -5 6 5 8. 4 10 investment? (b) If Isabel makes this investment, how much money will she have at the end of year 8? Does this calculation change your opinion on whether Isabel should make the investment? Why or why not? (c) Would increasing the interest rate make Isabel more or less likely to open this business?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Blossom Googal owns a garage and is contemplating purchasing a tire retreading machine for $32.820. After estimating costs and revenues, Blossom projects a net cash inflow from the retreading machine of $4,700 annually for 11 years. Blossom hopes to earn a return of 8% on such investments. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) What is the present value of the retreading operation? (Round answer to 2 decimal places, eg. 25.25) Present value 2$ Should Blossom Googal purchase the retreading machine?
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