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Instead of going on to an investment banking job that pays $150,000 per year, you have decided to try your luck in running your own
Instead of going on to an investment banking job that pays $150,000 per year, you have decided to try your luck in running your own business for the next ten years. Your business idea is to produce greeting cards, a new idea of sending cards to people and telling them how much and why you dislike them. The following items are associated with this project:
- An initial investment (t=0) in a printing machine worth $1,000,000. The machine is expected to last for 10 years and will have no salvage value. You use the straight- line depreciation method.
- You plan to hire a full time artist, paying him$50,000 per year (t=1, ... ,10).
- Since the idea is expected to catch on slowly, you expect revenues of$500,000 for the first five years (t=1, ... ,5), and then for the revenues to jump up to $1,000,000 per year for the remaining five years (t=6, ... ,10). The material costs, however, will remain at $250,000 per each year throughout(t=1, ... ,10).
- Helping with the material costs, you have discovered some perfectly usable paper in your basement. This should reduce paper costs by $25,000 per year for the first five years (t=1, ... ,5).
- You will need working capital of $45,000 during the first five years(t=1, ... ,5).Then, you plan to keep a working capital of $55,000 for the rest of the project's life (year 6 onward).
If a discount rate of 10% is appropriate for this project's cash flows, should you undertake the project? The corporate tax rate is 35%.
Needed
Cash Flows, PV of Cash Flows, NPV
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