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Jennie decides to start her own business by selling candles (Serenity by Jennie). She has the following information for her business venture: . Jennie requires
Jennie decides to start her own business by selling candles (Serenity by Jennie). She has the following information for her business venture: . Jennie requires an investment of $30,000 in year 1 to buy supplies, etc. . Jennie applies for a loan of $25,000 with an 8% effective interest rate in year 1. She will repay the loan with constant total payments in five years. . In addition, Jennie knows that she has to expand her business in year 3 which will cost $15,000. Jennie estimates that the business will have an annual cost of $9,000 which is subject to an inflation of 3%. . Jennie expects to generate a revenue of $14,000 in year 2, which will grow by 5% in each year. . The opportunity cost of money is 10%. (a) Construct a table containing the outflows, inflows, net cash flows, discounted cash flows, cash balances, and discounted cash balances for each year for 10 years. (b) What is the net present value for the cash flows? What does it represent? Explain why Jennie should or should not undertake this project based on its NPV. (c) What is the internal rate of return of Serenity by Jennie? What does it represent? Explain why Jennie should or should not undertake this project based on its IRR. (d) What happens to the NPV if the discount rate is equal to the IRR? What does this mean? What is Jennie preference toward the project in this case? Jennie decides to start her own business by selling candles (Serenity by Jennie). She has the following information for her business venture: . Jennie requires an investment of $30,000 in year 1 to buy supplies, etc. . Jennie applies for a loan of $25,000 with an 8% effective interest rate in year 1. She will repay the loan with constant total payments in five years. . In addition, Jennie knows that she has to expand her business in year 3 which will cost $15,000. Jennie estimates that the business will have an annual cost of $9,000 which is subject to an inflation of 3%. . Jennie expects to generate a revenue of $14,000 in year 2, which will grow by 5% in each year. . The opportunity cost of money is 10%. (a) Construct a table containing the outflows, inflows, net cash flows, discounted cash flows, cash balances, and discounted cash balances for each year for 10 years. (b) What is the net present value for the cash flows? What does it represent? Explain why Jennie should or should not undertake this project based on its NPV. (c) What is the internal rate of return of Serenity by Jennie? What does it represent? Explain why Jennie should or should not undertake this project based on its IRR. (d) What happens to the NPV if the discount rate is equal to the IRR? What does this mean? What is Jennie preference toward the project in this case
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