Grey Mountain Summit Company is
considering starting a small catering business in Whitehorse. The
company would need to purchase a delivery van and equipment costing
$125,000 to operate the business and another $60,000 for
inventories and other working capital needs. Rent for the building
to be used by the business will be $35,000 per year. Bree, a
Business student at YU and part time employee at Grey Mountain,
indicates that the annual cash inflow from the business will amount
to $120,000. In addition to the building rent, annual cash outflow
for operating costs will amount to $40,000. Bree wants to operate
the catering business for only six years. She estimates that the
equipment could be sold at that time for 4% of its original cost.
Bree uses a 16% discount rate. (Ignore income taxes in this
problem.)
Required:
- Would you advise Bree to make this investment? Use Net Present Value and Profitability analysis to support your decision.
|
Description |
Years |
Amount |
16% Factor |
Present Value |
|
Van & Equipment |
0 |
-125,000 |
1 |
-$125,000 |
|
Working Capital |
0 |
-60,000 |
1 |
-$60,000 |
|
Building Rent |
1-6 |
-35,000 |
3.685 |
-$128,975 |
|
Net Annual Cash |
||||
|
In-Flow |
1-6 |
80000 |
3.685 |
$294,800 |
|
Salvage Value |
||||
|
Equipment |
6 |
5,000 |
0.41 |
$2,050 |
|
Release of Working |
||||
|
Capital |
6 |
60,000 |
0.41 |
$24,600 |
|
Net Present Value |
$7,475 |
