Mark Stevens is considering opening a hobby and craft store. He would need $100,

Question

Mark Stevens is considering opening a hobby and craft store. He would need $100,000 to equip the business and another $40,000 for inventories and other working capital needs. Rent on the building used by the business will be $24,000 per year. Mark estimates that the annual cash inflow from the business will amount to $90,000. In addition to building rent, annual cash outflow for operating costs will amount to $30,000. Mark plans to operate the business for only six years. He estimates that the equipment and furnishings could be sold at that time for 10% of their original cost. Mark uses a discount rate of 16%.

Required:

Would you advise Mark to make this investment? Use the net present value method. (please show all your works!)

Explanation / Answer

Hi,

Please find the answer as follows:

Initial Cash Flow = 100000 + 40000 = 140000

Annual Cash Inflow = 90000 - 24000 -30000 = 36000

NPV = -140000 + 36000/(1+.16)^1 + 36000/(1+.16)^2 + 36000/(1+.16)^3 + 36000/(1+.16)^4 + 36000/(1+.16)^5 + 36000/(1+.16)^6 + 50000/(1+.16)^6 = 13172.61

Yes, the investment should be made as the NPV is positive.

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.