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Thread: Quantative

  1. #1
    May 2014
    Reading, United Kingdom

    Angry Quantative

    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)

    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
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  2. #2
    MHF Contributor
    Feb 2014
    United States

    Re: Quantative

    We don't give answers. As our name implies, we help YOU get the proper answer so you can answer such questions on a test when we are not there. So please show your work up to where you are stuck, or if you were unable even to start, please explain what is stopping you.
    Thanks from romsek
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