Zax's friend Banner has worked in IT for a bit over a decade. Banner has suggested Zax
Question:
Zax's friend Banner has worked in IT for a bit over a decade. Banner has suggested Zax add a repair and support service to his business, and Banner would be willing to run this new part of the business.
Zax is interested in this proposition, but needs to do some calculations to see if it is financially worthwhile. He has asked around and gathered the following information/made the following assumptions:
- Zax will consider this repair and support service only over the next three years (i.e. he will assume this service and any associated cash flows will only last 3 years)
- The startup cost (buying new equipment, advertising, etc.) will be $42,000, payable immediately.
- Zax would like to compensate Banner for his time over the coming 3 years (with something other than "exposure"!). He believes that $250 per week would be a reasonable amount (this is not a full-time commitment of Banner's time after all). The first such payment would be today.
- Zax would need a return of at least 14.9% p.a. effective for this proposition to be worthwhile.
Due to various factors, such as time needed to perform repairs and clients taking time to send through payments, Zax believes that the money from this this repair and support service will be receivable quarterly. The first payment will be received exactly 6 months (i.e. half a year) from today, the final payment will be received exactly 3 years from today. He also believes these payments will be a level amount each quarter.
Calculate the effective quarterly rate that Zax would need to earn. Give your answer as a percentage to 4 decimal places.
