(Ignore income taxes in this problem.) Bill Anders retires in 5 years. He would
ID: 2499029 • Letter: #
Question
(Ignore income taxes in this problem.) Bill Anders retires in 5 years. He would have to purchase equipment costing $500,000 to equip the outlet and invest an additional $150,000 for inventories and other working capital needs. Other outlets in the fast-food chain have an annual net cash inflow of about $160,000. Mr. Anders would close the outlet in 5 years. He estimates that the equipment could be sold at that time for about 10% of its original cost and the working capital would be released for use elsewhere. Mr. Anders' required rate of return is 16%.
Explanation / Answer
(a) The net present value is computed as given below:
(b) Since the project has a negative net present value, it is not recommended for approval.
Year Cash Flow PV factor @ 16% Present Value 0 -$6,50,000 1 -$6,50,000.00 1 $1,60,000 0.8621 $1,37,931.03 2 $1,60,000 0.7432 $1,18,906.06 3 $1,60,000 0.6407 $1,02,505.23 4 $1,60,000 0.5523 $88,366.58 5 $3,60,000 0.4761 $1,71,400.69 NPV -$30,890.41Related Questions
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