You are thinking of starting a business. You would finance it with 60% equity and 40% debt.
Question:
You are thinking of starting a business. You would finance it with 60% equity and 40% debt. Relevant rates are as follows:
Small business tax rate - 18.62%
Risk free rate -4%
Your pre-tax borrowing rate -9.216%
Expected return on stock market -12%
You estimate that your firm's (beta) will be 0.75.
The business you are thinking of starting is a house painting business. You hired a FINA2710 graduate to develop cash flow estimates for you and you have paid that FINA 2710 grad $300 for their work. They estimated that you would need to purchase a truck. You could buy a truck for $18,000, and it would have a capital cost allowance (CCA) rate of 30%. You would also need to establish a $250 inventory of rollers and brushes. The estimated annual pre-tax net operating cash inflow is $9,500.
a) What is the Net Present Value (NPV) of starting the business, operating it for 2 years, and after that keeping the truck but not the inventory?
b) What is the NPV of starting the business, operating it for 2 years, and then winding up all aspects of the business, including selling the truck for $10,000? (The business has no other automotive assets).