Mr. Ujuzi intends to retire from active employment in the next 20 years currently he has two options;
i. Retire from employment and forgo Sh. 250,000 p.a. for the next 20 years.
ii. Go into business whose financial information is as follows: a) He will require Ksh.2, 375,000 now to start off business.
b) The Business will have a 20 year economic life and it will generate the following cash flows.
Year
1-15
16-20
Cash-flows
625,000
500,000
c) The salvage value of the business at the end of 20 years period will be Ksh.750, 000. The cash flows will be received at the end of the year.
d) The business will require additional operating costs which will be incurred as follows;
Year
Annual
operating
1-5
expenses
6-10
11-17
18-20
"000" Shs
50,000
75,000
100,000
0
All the operating expenses will be paid at the beginning of each
year.
The appropriate discounting rate is 12%
Required:
Advice Mr. Ujuzi whether to retire or not to retire. (20 Marks)