Question
A company is considering an investment which will require two payments $53,000 each at the beginning and at the end of the first year. The
A company is considering an investment which will require two payments $53,000 each at the beginning and at the end of the first year. The company expects the investment to achieve revenues of $31,100 per year up to and including the eighth year. Revenues begin to be collected at the end of the second year. Minimum Acceptable Rate of Return (MARR) = 6%. Please note that because this project is an investment, MARR provides the mathematical interest rate used for calculations
(i). a) Draw the cash flow diagram (CFD) for this investment showing cost and revenue components of the CFD.
b) If all the initial costs needed for this investment are to be financed from a line of credit. What is remarkable about a line of credit, as opposed to a loan, is that you can borrow the money whenever you want. Interest will only accrue after you borrow. The credit limit will always be available, even if you choose not to use it. That is, money can be borrowed whenever needed from an account up to $200,000. The interest rate on this line of credit is 2.5% per year compounded daily (assume 365 day per year). Because the investor can pay back at any time, you need to choose the best strategy to pay-back the debt from the following:
b.1) Pay as soon as possible
b.2) Pay as late as possible
b.3) Pay as uniform annual payments starting from the end of the second year.
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