Mark Stevens Is Considering Opening a Hobby and Craft Store

question 113

Essay

Mark Stevens is considering opening a hobby and craft store.He would need $100,000 to equip the business and another $40,000 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 16%.
Required:
Would you advise Mark to make this investment? Use the net present value method.

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