Question 18.ss.1: Your sister wants to open a store that sells antique-style j...
Your sister wants to open a store that sells antique-style jewelry and accessories. She has $15,000 of savings to invest, but opening the store will require an initial investment of $20,000. Net cash inflows will be-$2,000, -$1,000, and $0 in the first three months. As the store becomes better known, net cash inflows will become +$500 in the fourth month and grow at a constant rate of 5 percent in the following months. You want to help your sister by providing the additional money that she needs. How much money do you have to invest each month to start and to keep the store operating with a minimum cash balance of $1,000?
You will have to invest $5,000 to open the store (the difference between $20,000 and $15,000). You will then have to invest an additional $3,000 during the first month to cover the cash flow of –$2,000 and to establish a cash balance of $1,000. Another $1,000 will be required in the second month to cover the negative cash flow during that month. Since cash flows will be $0 or positive beginning in the third month, you will not have to invest any additional funds after the second month.