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.

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