Question
Mark Stevens is considering opening a hobby and craft store. He would need $120,000 to equip the business and another $50,000 for inventories and other
Mark Stevens is considering opening a hobby and craft store. He would need $120,000 to equip the business and another $50,000 for inventories and other working capital needs. Rent on the building used by the business will be $24,000 per year. Mark estimates that the annual cash inflow from the business will amount to $90,000. In addition to building rent, annual cash outflow for operating costs will amount to $30,000. Mark plans to operate the business for only six years. He estimates that the equipment and furnishings could be sold at that time for 10% of their original cost. The working capital will be fully released for other purposes at the end of the six years. Mark uses a discount rate of 12%.
Required: Part A: Would you advise Mark to make this investment? Use the net present value method. Part B: If Marks IRR is computed as 14% should he accept or reject the investment
B C D 1 Question #1 2 PARTA 3 Description 4 Years Cash Flow Discount Rate Present Value 5 6 7 8 9 11 14 15 16 17 18 19 20 PART B 21Step by Step Solution
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