(Ignore income taxes in this problem.) Jane Summers has just inherited $750,000
ID: 2530355 • Letter: #
Question
(Ignore income taxes in this problem.) Jane Summers has just inherited $750,000 from her mother's estate. She is considering investing part of these funds in a small catering business. She would need to purchase a delivery van and various equipment costing $115,000 to equip the business and another $53,000 for inventories and other working capital needs. Rent on the building used by the business will be $28,500 per year. Jane's marketing studies indicate that the annual cash inflow from the business will amount to $97,500. In addition to the building rent, other annual cash outflows for operating costs will amount to $34,500. Jane wants to operate the catering business for only five years. She estimates that the equipment could be sold at that time for about 10% of its original cost. Jane's required rate of return is 15%.
Compute the net present value of this investment. (Input the amount as a positive value. Round "PV Factor" to 3 decimal places. Round your other intermediate calculations and final answers to the nearest whole dollar.) (Use Exhibit 11B-1, Exhibit 11B-2)
(Ignore income taxes in this problem.) Jane Summers has just inherited $750,000 from her mother's estate. She is considering investing part of these funds in a small catering business. She would need to purchase a delivery van and various equipment costing $115,000 to equip the business and another $53,000 for inventories and other working capital needs. Rent on the building used by the business will be $28,500 per year. Jane's marketing studies indicate that the annual cash inflow from the business will amount to $97,500. In addition to the building rent, other annual cash outflows for operating costs will amount to $34,500. Jane wants to operate the catering business for only five years. She estimates that the equipment could be sold at that time for about 10% of its original cost. Jane's required rate of return is 15%.
Explanation / Answer
Year(s) Cash flow PV factor Present value of cash flows Cost of equipment Now -115000 1 -115000 Working capital needed Now -53000 1 -53000 Net annual cash flows 1-4 34500 3.352 115644 Salvage value of equipment 4 11500 0.497 5716 Working capital released 4 53000 0.497 26341 Net present value -20300
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