Mark Stevens is considering opening a hobby and craft store. He would need $120,000 to equip the business and another $50,000 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. The working capital will be fully released for other purposes at the end of the six years. Mark uses a discount rate of 12%.

Required:

Part A: Would you advise Mark to make this investment? Use the net present value method. 

Part B: If Mark’s IRR is computed as 14% should he accept or reject the investment

 

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H Assignment #5 Q- Search Sheet Home Insert Page Layout Formulas Data Review View + Share a Insert Σ Calibri (Body) 11 A. A- Ee Wrap Text General Delete Paste B U A E Merge & Center Conditional Format Cell E Format Sort & Filter Formatting as Table Styles A4 v fx A B G H K L M N R 1 Question 1 2 PARTA Description Present Value 3 Years Cash Flaw Discount Rate 4. 6 10 11 12 13 14 15 16 17 18 19 20 PART B 21 22 23 24 25 H Assignment #5 Q- Search Sheet Home Insert Page Layout Formulas Data Review View + Share a Insert Σ Calibri (Body) 11 A. A- Ee Wrap Text General Delete Paste B U A E Merge & Center Conditional Format Cell E Format Sort & Filter Formatting as Table Styles A4 v fx A B G H K L M N R 1 Question 1 2 PARTA Description Present Value 3 Years Cash Flaw Discount Rate 4. 6 10 11 12 13 14 15 16 17 18 19 20 PART B 21 22 23 24 25

Answer rating: 100% (QA)

A Initial investment cost to equip Working capital120000 50000170000 Annual cashflow Annual cash inf... View the full answer