Mark Stevens Is Considering Opening a Hobby and Craft Store

question 15

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 for the building to be 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. Mark uses a discount rate of 16%. (Ignore income taxes in this problem.)

Required:

Would you advise Mark to make this investment? Use the net present value method.

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Definitions:

Conducting

involves directing or leading a group, especially in the context of music where a conductor leads an orchestra or choir.

Formulating Strategy

The process of creating strategies to achieve specific organizational objectives.

Competitive Strategies

Approaches that organizations use to gain a competitive edge in the market, often through innovation, quality, cost leadership, or customer focus.

Michael Porter

An economist and professor renowned for his theories on economics, business strategy, and social causes.