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In: Finance

You are considering leasing space at a local mall for 4 years, so you can open...

You are considering leasing space at a local mall for 4 years, so you can open a coffee shop. The initial outlay (CF0 – this is an expense) is $50,000. The shop is projected to generate the following cash flows: CF1=$10,000; CF2=$15,000; CF3=$15,000; CF4=$20,000. If the cost of capital is r=2%, would you undertake this project? What if the cost of capital were 10%? Calculate the NPV in each case and justify your decision. At what value of the cost of capital would you just break even?

Solutions

Expert Solution

NPV is positive when cost of capital is 2%.

Formula used

Similarly,

At 6%, NPV = 1,220.07

At 7%, NPV = -50.75

Interpolation = 6% + 1,220.07 / (1,220.07 - (-50.75)) *1

Internal rate of return = 6% + 0.96

After interpolation, 6.96% is the cost of capital at which values will break even.

jeff jeffy answered 1 year ago
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