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You have the opportunity to run a coffee shop in the lobby of a nearby...

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Question

Accounting

You have the opportunity to run a coffee shop in the

lobby of a nearby office building for one year.

Your research indicates that an upfront investment

of $24,000 is required to start.

After covering your operating costs (including your

wage), you expect to generate a cash flow of

$34,500 at the end of the year.

Your discount rate is 15%, which is the sum of the

risk-free rate of 5% and a 10% risk premium.

Question: If you had a guaranteed income of $16,000, how much could you borrow risk free?

Answer given by the textbook: You can borrow $15,000 and still have enough to pay off interest 15,000(0.05)=750. You will be able to pay the debt of $15,750

I dont understand how the person got $15,000 though. It could be $15,100 and still have enough money to pay off the debt ($755). Thank you for the help

Answer & Explanation Solved by verified expert
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