Question #1

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

Transcribed image text: # Assignment #5 Search Sheet Home Insert Page Layout Formulas Data Review View + Share Insert Calibri (Body) 11 A- A- Wrap Text General L Ex Delete Paste B 1 U A- Merge & Center $ % .00 Conditional Format Formatting as Table Cell Styles Format Sort 8 Filter A4 x foc A D E F H 1 J K L M N 0 R Years Cash Flow Discount Rate Present Value 1 Question 111 2 PARTA 3 Description 4 5 6 7 7 B 8 9 10 11 12 13 15 16 17 18 19 20 PARTE 21 22 23 24 25