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A friend proposes to him to invest in a business for which he has projected the...

A friend proposes to him to invest in a business for which he has projected the following costs and income: 1. Initial cost of $ 100 0002. Expenditure in year 1 of $ 50 0003. Annual expenses from year 2 to 10 of $ 10 000. Additionally he projects that from In year 4, these expenses will increase by $ 2,000 each year. 4. Annual income of $ 40,000 from year 1 to 10. Additionally, it projects that from year 4, income will grow by 15% each year. a) (10 points) calculate the PV using a 5% rate b) (5 points) calculate the annual value using a 5% rate c) (5 points) would you invest in this business? Why? ~ 5 ~

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Expert Solution

YEAR BASE (5%) PV FACTOR (A) CASH OUTFLOWS (B) CASH INFLOWS [C] NET CASH FLOW D = C-B PV OF CASH FLOW D*A
0 1 1 100000 0 -100000.00 -100000.00
1 1/1.05 0.952 50000.00 40000.00 -10000.00 -9523.81
2 (1/1.05)^2 0.907 10000.00 40000.00 30000.00 27210.88
3 (1/1.05)^3 0.864 10000.00 40000.00 30000.00 25915.13
4 (1/1.05)^4 0.823 12000.00 46000.00 34000.00 27971.88
5 (1/1.05)^5 0.784 14000.00 52900.00 38900.00 30479.17
6 (1/1.05)^6 0.746 16000.00 60835.00 44835.00 33456.57
7 (1/1.05)^7 0.711 18000.00 69960.25 51960.25 36927.18
8 (1/1.05)^8 0.677 20000.00 80454.29 60454.29 40917.84
9 (1/1.05)^9 0.645 22000.00 92522.43 70522.43 45459.39
10 (1/1.05)^10 0.614 24000.00 106400.80 82400.80 50586.94
209401.17

1) NET PRESENT VALUE USING 5% = 209400 APPROX

2) ANNUAL IS GIVEN IN ABOVE TABLE FOR EACH YEAR

3) WE SHOULD INVEST IN THIS PROJECT AS NPV IS POSITIVE

FORMULA USED IN ABOBE TABLE IS SHOWN BELOW

YEAR BASE (5%) PV FACTOR (A) CASH OUTFLOWS (B) CASH INFLOWS [C] NET CASH FLOW D = C-B PV OF CASH FLOW D*A
0 1 1 100000 0 =E11-D11 =F11*C11
1 1/1.05 =1/1.05 50000 40000 =E12-D12 =F12*C12
2 (1/1.05)^2 =(1/1.05)^2 10000 40000 =E13-D13 =F13*C13
3 (1/1.05)^3 =(1/1.05)^3 10000 40000 =E14-D14 =F14*C14
4 (1/1.05)^4 =(1/1.05)^4 12000 =E14+E14*15% =E15-D15 =F15*C15
5 (1/1.05)^5 =(1/1.05)^5 14000 =E15+E15*15% =E16-D16 =F16*C16
6 (1/1.05)^6 =(1/1.05)^6 16000 =E16+E16*15% =E17-D17 =F17*C17
7 (1/1.05)^7 =(1/1.05)^7 18000 =E17+E17*15% =E18-D18 =F18*C18
8 (1/1.05)^8 =(1/1.05)^8 20000 =E18+E18*15% =E19-D19 =F19*C19
9 (1/1.05)^9 =(1/1.05)^9 22000 =E19+E19*15% =E20-D20 =F20*C20
10 (1/1.05)^10 =(1/1.05)^10 24000 =E20+E20*15% =E21-D21 =F21*C21
=SUM(G11:G22)

THANK YOU PLEASE UPVOTE

ekkarill92 answered 1 year ago
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