Question 6 (a) Anu wants to put aside an amount at the beginning of each month while working for the next 5 years. At the end of the 5 years, she wants to start a business and she plans to have a budget for it of at least $50,000. (i) How much should she put aside each month if interest payable on her savings is 1.5%p.a.? (Give your answer to 2 decimal places.) (ii) If she would deposit the amount found at (i), each month, in perpetuity, what would be the present value of it? (b) Suppose that the sum of $100 is invested at an annual rate of interest of 10%. Calculate the value of the investment in 5 years' time if the interest is compounded (i) weekly and (ii) semi-annually Show all your calculations. (Give your answer to 2 decimal places.) (c) The net cash flow for two projects, Coffee Shop and Hair Salon, are as follows: Year 0 Coffee Shop -$10 000 -$5 000 $15,000 $7,000 (i) Use the net present value criterion to decide which business project is the most profitable if the market interest rate is 6%. Explain your answer and show all your calculations. (Give your answer to 2 decimal places.) Hair Salon 4 (ii) Estimate the IRR of the Hair Salon project and decide whether this project would proceed? Explain your answer and show all your calculations. (Give your answer to 1 decimal place.)
Question 6 (a) Anu wants to put aside an amount at the beginning of each month while working for the next 5 years. At the end of the 5 years, she wants to start a business and she plans to have a budget for it of at least $50,000. (i) How much should she put aside each month if interest payable on her savings is 1.5%p.a.? (Give your answer to 2 decimal places.) (ii) If she would deposit the amount found at (i), each month, in perpetuity, what would be the present value of it? (b) Suppose that the sum of $100 is invested at an annual rate of interest of 10%. Calculate the value of the investment in 5 years' time if the interest is compounded (i) weekly and (ii) semi-annually Show all your calculations. (Give your answer to 2 decimal places.) (c) The net cash flow for two projects, Coffee Shop and Hair Salon, are as follows: Year 0 Coffee Shop -$10 000 -$5 000 $15,000 $7,000 (i) Use the net present value criterion to decide which business project is the most profitable if the market interest rate is 6%. Explain your answer and show all your calculations. (Give your answer to 2 decimal places.) Hair Salon 4 (ii) Estimate the IRR of the Hair Salon project and decide whether this project would proceed? Explain your answer and show all your calculations. (Give your answer to 1 decimal place.)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Question 6
(a) Anu wants to put aside an amount at the beginning of each month while working for the next 5
years. At the end of the 5 years, she wants to start a business and she plans to have a budget for it of
at least $50,000.
(i) How much should she put aside each month if interest payable on her savings is 1.5%p.a.?
(Give your answer to 2 decimal places.)
(ii) If she would deposit the amount found at (i), each month, in perpetuity, what would be the
present value of it?
(b) Suppose that the sum of $100 is invested at an annual rate of interest of 10%. Calculate the value
of the investment in 5 years' time if the interest is compounded
(i) weekly
and
(ii) semi-annually
Show all your calculations. (Give your answer to 2 decimal places.)
(c) The net cash flow for two projects, Coffee Shop and Hair Salon, are as follows:
Year
0
Coffee Shop -$10 000
Hair Salon -$5 000
4
$15,000
$7,000
(i) Use the net present value criterion to decide which business project is the most profitable if
the market interest rate is 6%. Explain your answer and show all your calculations. (Give
your answer to 2 decimal places.)
(ii) Estimate the IRR of the Hair Salon project and decide whether this project would proceed?
Explain your answer and show all your calculations. (Give your answer to 1 decimal place.)
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