Jim Bingham Is Considering Starting a Small Catering Business

question 31

Essay

Jim Bingham is considering starting a small catering business.He would need to purchase a delivery van and various equipment costing $125,000 to equip the business 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.Jim's marketing studies indicate that the annual cash inflow from the business will amount to $120,000.In addition to the building rent,annual cash outflow for operating costs will amount to $40,000.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.The working capital will be fully released for other purposes at the end of the six years.Jim uses a 16% discount rate.
Required:
Would you advise Jim to make this investment?

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Definitions:

Advertises Heavily

A strategy where a product or service is promoted extensively through various media channels to increase consumer awareness and sales.

Natural Monopoly

A market situation where a single firm can provide a good or service at a lower cost than any potential competitor, often due to economies of scale.

Defining Characteristic

A feature that allows the clear identification or differentiation of an item or concept from others.

Associated Cost

Costs that are directly linked with a specific activity, process, or project.