Finance question help (FINS1613) (1 Viewer)

[shaniqua1]

http://imgur.com/Cs6a9Gx

Hello.
My dilemna is the first equation given.
Why does it only have C_1 (the revenue) when C_1 also grows with factor of (1+0.06) per year? Shouldn't it be C_1 (1.06)^n
Also, when I solve inequality it gives years n> ...
n should be "<" if it wants to shut down right?

 

[obliviousninja]

Trick question. Read closely

 

[shaniqua1]

I can't see it

 

[Amundies]

I'm assuming you've done as ON said and still can't figure it out.

I'm not 100% sure if I'm right about what you don't understand, but I'll say it anyway. The first equation is basically revenue - expenses < 0. Revenue is constant per year (stated in question) which is why it doesn't grow. If revenue were to grow, you won't be able to use that second simple annuity formula because that assumes a fixed payment over a period of time.
For your second question, they are solving for the year when expenses > profits which will tell you what year you will need to stop the project by. You'd get an answer of n > 10.85 (for example, no idea what the number actually is), which means that after 10.85 years expenses will always be > profits. So you'd want n < 10.85, which is what you said.

 

[Tonic Note]

https://45.media.tumblr.com/46a62b93c419fb682b5f066ed1f3a32f/tumblr_o42htzdsWu1v9kamgo1_400.gif