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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Transcribed Image Text:3. 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.
Year
1 2 3 4 5 6 7
8
Cash flow -20 -10
-5
6 5
8| 4
10
(a) Find the net present value of the Isabel's business opportunity. Should Isabel make this
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?
Explain briefly.
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