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:

1.Would you advise Bree to make this investment? Use Net Present Value and Profitability analysis to support your decision.

16% Present Description Years Amount Factor Value Van & equipment 0 ($125,000) 1.000 ($125,000) Working Capital 0 ($60,000) 1.000 ($60,000) Building rent 1-6 ($35,000) 3.685 ($128, 975) Net annual cash Inflow 1-6 $80,000 3.685 $294,800 Salvage values Equipment 6 $5,000 0.410 $2,050 Release of working Capital 6 $60,000 0.410 $24,600 Net Present Value $7,475