A Project Will Cost $12,000 and Will Provide Cash Flows

question 19

Short Answer

A project will cost $12,000 and will provide cash flows of $3,000, $5,000, and $5,600 at
the end of the following three years. The annualized interest rate is 8% per annum
over one year, 8.5% per annum over two years, and 9.2% per annum over three years.
Should you undertake this project? Explain your answer.

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Definitions:

Required Reserve Ratio

The fraction of deposits that banks are mandated by regulation to hold in reserve and not lend out.

Excess Reserves

The banks' reserves over and above the required minimum that they choose to hold rather than loan out.

Depositors

People or organizations that deposit their funds into a bank to secure them and gain interest as time passes.

Borrowers

Individuals or entities that take funds from a lender under the agreement to pay back the principal amount along with interest.