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To set up the business, you decide to use all your savings. Your parents have been saving $ 2000.00 yearly since you were born and the fixed nominal interest rate was 6%. You are now 27 years old.

a. How much money do you have in your account NOW?

However, the amount is not sufficient and you decide to take a loan of $ 75,000. The bank is offering a 10 year loan that requires a monthly payment. The nominal interest rate is 6%.

b. How much will be your monthly payment?

c. How much interest and principle will be paid in the first month?

Your personal banker added a clause in the contract. To be entitle for the loan, the business should yield a positive NPV.

To set up the business, you will be required to purchase an equipment costing $ 60,000.00. You expect inventory will increase by $ 18,000.00 and accounts payable will increase by $ 5000.00. All the other working capital components will stay the same. So the change in net operating working capital is $ 13,000.00 at t= 0.

You expect to keep the company for 4 years and you expect to sell 20,000 units of peanut butter at a unit price of $35.00 and believe that both prices and quantity will remain the same. The fixed cost is $ 7,000 every year and variable costs will be $1.03 per unit. You plan to use the straight line depreciation and the equipment will be fully depreciated after 4 years. The salvage value is $$24,000 and tax rate is 23%

d. What are the incremental cash flows for the 4 years?

e. If the WACC is 11%, will you get the loan?

ANSWER D AND E ONLY.

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