You have an option to improve your business for 30000 You es

You have an option to improve your business for $30,000. You estimate the cash flows as given below. You can reinvest the earnings in the good years at the corner bank and earn 8% annually, and borrow at 10%. But you need to make 12% on the investment. 3. Will we make 12%? Show all your work, and justify your answer with calculations and words. a. Year CFAT -30,000 $20,000 $37,000 15,000 -$5,000

Solution

In the above table .......... DF = Discounting factor. This is calculated as 1/1.12 ...... for Year -1. Continue to press \"=\" on your calculator will give subsequent year values.

PV = Present value ........ the multiplication of CFAT with DF.

Yes ........ we will make more than 12% from this project. When NPV value is positive at 12% it implies that, the business is able to generate 12% return and even more than that because there is still a surplus of 3499

Year	CFAT	DF	PV
0	-30000	1	-30000
1	20000	0.892857	17857.14
2	37000	0.797194	29496.17
3	-15000	0.71178	-10676.7
4	-5000	0.635518	-3177.59
		NPV	3499.022