Question
Joe Meder is considering a project to buy a convenience store business at an initial cost of $600 000. It is expected the business will
Joe Meder is considering a project to buy a convenience store business at an initial cost of $600 000. It is expected the business will provide a growing stream of operating net cash inflows at the end of each year over the next 5 years. The initial operating cash inflow at the end of year 1 is $120, 000 and will increase by 5% each year. At the end of this time assume the business can be sold for $850,000. Ignoring any depreciation and assuming both income and capital gains are taxed at 40%, what will be the NPV of the project if it is assumed the risk is assessed at double the risk-free rate? It is noted that government securities are currently offering a return to investors of 6% p.a.
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