1. A firm has found from its bank that if it wants to borrow any money, it would be charged 7% interest. The firm is considering investing in a project that would cost $18000 today. If the firm invests in this project, the firm would increase the firms revenues by $5000 next year, $15000 the year after that without any increase in future costs. The firm currently has $18000 on hand in an account that pays 5% interest.

a) Determine whether the firm should invest in the project. (2 points)

b) Determine whether each of the following changes would make the firm change its decision on whether or not to make the investment. Be as specific in your calculations as you can. Be sure to consider each change separately.

1. The firm does not have $18000 on hand. (3 points)
2. Construction delays cause all the benefits to be delayed by one year. (2 points)
3. Economic predictions change so the firm expects to receive 10% lower prices for their output in the coming years. (3 points)

c) Without any new calculations, use the information in (a) and (b) give as precise a bound as you can for the value of the rate of return of this project. Give the formula for calculating the exact rate of return for this project. (2 points)