Suppose that your college roommate has approached you with an opportunity to lend $25,000 to her fledgling home healthcare business. The business, called Home Health Care, Inc., plans to offer home infusion therapy and monitored in-the-home healthcare services to surgery patients in the Birmingham, Alabama, area. Funds would be used to lease a delivery vehicle, purchase supplies, and provide working capital. Terms of the proposal are that you would receive $5,000 at the end of each year in interest with the full $25,000 to be repaid at the end of a ten-year period.
A. Assuming a 10% required rate of return, calculate the present value of cash flows and the net present value of the proposed investment.
B. Based on this same interest rate assumption, calculate the cumulative cash flow of the proposed investment for each period in both nominal and present-value terms.
C. What is the payback period in both nominal and present-value terms?
D. What is the difference between the nominal and present-value payback period? Can the present-value payback period ever be shorter than the nominal payback period?

  • CreatedFebruary 13, 2015
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