Hey guys, can you help me with that one :?

A business is considering developing a web site for its products at an initial

cost of £15,000. The directors anticipate that they will sell the whole business

after 7 years, and estimate that the additional value of having the “online”

outlet will be worth £20,000 pounds to the value of the company when they

sell it (in the 7th year). They anticipate the web site will cost more to

administrate in the first few years than the revenue stream that it generates.

Complete the Table (inclusive of the initial cost and additional value at the

time of sale) and determine whether the development should be undertaken

using an interest rate of 5%. (11 marks)

period:

0. Initial Cost Discount (1/(1+r)t ) Present Value(A/(1+r)t )

1. -1500.00 ----------- ------------

2. -1000.00 ---------- -------------

3. 0.00 ----------- -------------

4. 1500.00 -------- -----------

5. 2000.00 ------------- --------------

6. 3000.00 ---------- -----------

7. 5000.00 + Additional Resale Value -------- --------

b) Now assume that there is a 50% probability that:

i) The final value of the company will increase in value by £15,000

after 7 years; and,

ii) The interest rate will be 6% instead of 5%.

Determine whether it is wise to continue with the project. (11 marks)

c) The business has the opportunity to buy an annuity for £20,000. This annuity

will yield £4,000 for 7 years. Determine whether they would be better off

buying this annuity relative to undertaking the investment above under the

assumptions in part b). As in part b), assume that there is a 50% chance that

the interest rate is 6% and a 50% chance that it is 5%.

Use the formula for calculating an annuity

M(1-(1+r)-n) / r

(6 marks)

d) If the company is risk averse, then will this have any impact on the

conclusions above?

Thanks in advanve