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Part B: New Location Rhonda has found a location for the next store she plans to open....

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Finance

Part B: New Location

  1. Rhonda has found a location for the next store she plans toopen. The store front will require $30,000 in renovations before itis ready to open. She would like the initial investment to be paidoff in 5 years. Assuming a discount rate of 4.5%, what will herannual profits for the store need to be if she wishes to recoverthe $30,000 in 5 years (assuming equal profits each year)?
  2. What if the discount rate increased to 7.75%? What would herannual profits need to be to recover the $30,000 in 5 years?

If Rhonda expects profits from the new location in Part B to be$7,250 annually, should she open the new location? First, if thediscount rate is 4.5%? Then, if the discount rate is 7.75%?

Please show your work so I can understand how you get to theanswers.  

Thank you!

Answer & Explanation Solved by verified expert
4.3 Ratings (780 Votes)
Rhonda aims at recovering the initial investment of 30000 in 5 years time This implies that the present value of the annual profits over the 5 years of the project should sum up to equal the initial    See Answer
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