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1. You have decided to purchase an existing business that publishes the computer magazine called Nerd. You can buy the business for $150,000. The expenses
1. You have decided to purchase an existing business that publishes the computer magazine called Nerd. You can buy the business for $150,000. The expenses are estimated to be $125,000/year for the first 2 years and $70,000/year for the next 2 years. Revenue is expected to be S125,000 per year. You estimate that you can sell the business at the end of 4 years for the original purchase price. You want to earn at least 11% per year on your investment. All expenses are assumed to occur at the beginning of the year and all revenue at the end of the year. (a) What is the payback period for this investment? [3 marks] (b) What is the IRR? Should you invest? (5 marks) (c) What is the NPV? Should you invest? [2 marks] (d) Your accountant tells you that you could sell your business for more than you estimated at the end of 4 years. What is the minimum selling price you need to make this investment worthwhile? [4 marks] (e) Your accountant has advised you that you should not purchase the magazine unless you earn at least 13% per year on your investment. The government is offering an annual subsidy to Canadian publishers to encourage the publication of Canadian magazines. The subsidy is received at the end of each year. What annual subsidy would you require to make this investment worthwhile if you want to earn at least 13% per year on your investment? [6 marks]
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