Zax's friend Banner has worked in IT for a bit over a decade. Banner has suggested Zax add a repair and support service to his business, and Banner would be willing to run this new part of the business. Zax is interested in this proposition, but needs to do some calculations to see if it is financially worthwhile. He has asked around and gathered the following information/made the following assumptions: Zax will consider this repair and support service only over the next three years (i.e. he will assume this service and any associated cash flows will only last 3 years) The startup cost (buying new equipment, advertising, etc.) will be $33,000, payable immediately. Zax would like to compensate Banner for his time over the coming 3 years (with something other than "exposure"!). He believes that $320 per week would be a reasonable amount (this is not a full-time commitment of Banner's time after all). The first such payment would be today. Zax would need a return of at least 13% p.a. effective for this proposition to be worthwhile. (a) Calculate the equivalent effdective weekly rate that Zax would need to earn. Give your answer as a percentage to 4 decimal places. (1 mark) Answer: (b) Using your answer from part a), calculate the present value of the compensation Zax will pay Banner over the coming 3 years. Give your answer to the nearest cent. (1 mark) Answer: Due to various factors, such as time needed to perform repairs and clients taking time to send through payments, Zax believes that the money from this this repair and support service will be receivable quarterly. The Afirst payment will be received exactly 6 months (i.e. half a year) from today, the Afinal payment will be received exactly 3 years from today. He also believes these payments will be a level amount each quarter. ) Calculate the effective quarterly rate that Zax would need to earn. Give your answer as a percentage to 4 decimal places. (1 mark) Answer: (d) Ignoring the compensation he is paying to Banner i.e. only considering the startup cost of $33,000), calculate the level quarterly payment he would require to make this new service worthwhile. Give your answer to the nearest cent. (1 mark) Answer: Zax decides to go through with setting up this repair and support service. However, it turns out that some of his estimates above were not accurate: The estimated startup cost of $33,000 was correct. The fifrst level quarterly payment Zax receives will be exactly 3 months from the start of this service (and not 6 months as Zax estimated). However, the level quarterly payment Zax would receive is more likely to be 3124.3487111293. These quarterly payments are still expected to only last for 3 years. Again, ignoring the compensation he is paying to Banner, determine the return Zax is earning on this repair and support service, expressed as a nominal annual rate compounding quarterly. Give your answer as a percentage to 4 decimal places
