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Six years have passed, and Donald is now considering selling his restaurant. Judy and Sarah are two dierent investors, both interested in purchasing the restaurant.

a) Judy plans to purchase and continue operating the restaurant. She calculates that in addition to the purchase price, she would have to pay:

• $15,000 today in fees and taxes for the transaction, and
  
• $20,000 for renovations, paid one month from today.

These renovations will finish one month from today, when the restaurant is expected to be ready to open. Once the restaurant opens, it is expected to generate a recurring income of $35,000 per month indefinitely, receivable at the end of each month. Explicitly, the first payment is exactly 2 months from the purchase date.

Which of the following is an equation that, when solved, would give the effective monthly rate Judy earns on her investment? (1 mark)

a.

(Purchase Price)+15,000+20,0001+=35,000(1+)+15,000+20,0001+i=35,000i(1+i)

b.

(Purchase Price)+15,000+20,000=35,000+15,000+20,000=35,000i

c.

(Purchase Price)+(15,000+20,000)(1+)1=35,000(1+)+(15,000+20,000)(1+i)1=35,000i(1+i)

d.

(Purchase Price)+15,000+20,000=35,000(1(1+))

Second question:

Sarah, on the other hand, plans to run the restaurant as-is for one year, and then sell it after 2 years. She has projected the following cash flows:

• The purchase price is $1.14 million,
• Paying $15,000 today in fees and taxes for the transaction,
• The restaurant is expected to generate $41653.707952838 at the end of each month for the following 2 years.
• Sarah expects to sell the restaurant after 2 years for $1.42 million.
  

Determine the effective monthly rate that Sarah would be earning on this investment.

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