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?

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter4: Time Value Of Money

Section: Chapter Questions

Problem 16PROB

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