Jim Bingham Is Considering Starting a Small Catering Business

question 100

Essay

Jim Bingham is considering starting a small catering business. He would invest $125,000 to purchase a delivery van and various equipment and another $60,000 for inventories and other working capital needs. Rent for the building used by the business will be $35,000 per year. In addition to the building rent, annual cash outflow for operating costs will amount to $40,000. The annual cash inflow from the business will amount to $120,000. Jim wants to operate the catering business for only six years. He estimates that the equipment could be sold at that time for 4% of its original cost. Jim uses a 16% discount rate. All cash flows, except for the initial investment, would occur at the ends of the years.The investment in working capital would be returned at the end of the six years. (Ignore income taxes.)Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.Required:Compute the net present value of this investment.

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