Question
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
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 |
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