You are offered an investment in a new store. For this problem, assume away taxes. The store will sell furniture, and historically furniture prices have kept pace with inflation. The current revenue from the store is 20K a year. The current nominal interest rate is 7% and inflation is running at 3% a year. You expect this trend to continue for the 10 years of the contract. Should you make the required 140K investment?

yes, thepresent value fo the furnite investment is above their cost.

Explanation:

We calculate the present value of the annuity cosnidering the real rate of 4%

C20,000.00

time10 years

rate    0.04

PV$240,122.1425

We could also consider this a growing annuity as we are told that the furnitures prices kept the pace with inflation thus growing at 3% per year

and discount at 7% to know how much can we do:

g0.03

r0.07

C20,600 (the first year we receive 20,000 x 1.03)

n10

Future value:  320,966.01

Present value:

FV/1.07^10 = 163,162.85

This approach yield 7% and is still above the 140 rquired investment thus, we should consider to approve the investment.

none

explanation:

we're are the selections to pick from?