(present value) Suppose an entrepreneur considers to invest in a project. It needs a cash investment $I at year t = 0. If she/he invests, the project will generate an annual cash flow $x from year t = 1 to year t = T. The annual interest rate is r (that is, if she/he deposits cash I in a bank, she/he will have I (1 + r) one year after).
(a) What is the present discounted value of the annual cash flow at year t = 0?
(b) Suppose I = $100; x = $12; T = 10; and r = 5%: If you are the entrepreneur, will you invest in the project? Why?