Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A business investor is considering a new food venture on an isolated construction site. He has been given permission to operate on the site for

A business investor is considering a new food venture on an isolated construction site. He has been given permission to operate on the site for a period of 15 years. He has compiled the following information about the new proposed business venture:

Startup equipment: $450,000

Working capital required for new kitchen: $105,000

Expected annual cash inflow from food sales: $375,000

Expected annual cash expenses associated with the new business: $250,000

Restaurant upgrade required after 5 years: $55,000

At the end of the 15-year period, the equipment would be sold for its salvage value of $125,000. The company is required to pay taxes at the rate of 30%. It will calculate depreciation using the straight-line method, but it will not use the salvage value when computing depreciation for tax purposes.

Required:

a) Assuming a 15% after-tax cost of capital, compute net present value (NPV) of the new venture.

b) On the basis of your computations should this business be opened or not.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Accounting Tools For Business Decision Making

Authors: Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso

3rd Edition

047169195X, 978-0471691952

More Books

Students also viewed these Accounting questions

Question

Explain the various techniques of Management Development.

Answered: 1 week ago

Question

Identify ways to increase your selfesteem.

Answered: 1 week ago