Janelle Bates Has Just Inherited $250,000 from Her Uncle's Estate

question 86

Essay

Janelle Bates has just inherited $250,000 from her uncle's estate.She is considering opening a small sewing and fabric shop.She would need to purchase inventory costing $50,000.Janelle plans to rent a shop in a local shopping center for $12,000 per year.Fixtures,display equipment,and furniture will cost $18,000 and will be depreciated $3,000 per year for 5 years to its expected salvage value of $3,000.Operating costs will amount to $25,000 per year.Janelle estimates her revenues from sales and sewing services will total $65,000.Because Janelle believes she can earn a 10% return by investing in mutual funds,she does not want to start the business unless she can earn at least this rate.Ignore income taxes.
Required:
1)Prepare a schedule of expected cash flows for the proposed investment by completing the table provided below.In column 1 enter a brief description of the cash flow.In column 2 indicate whether the cash flow is an inflow (I)or an outflow (O).In column 3 enter the years in which the cash flow will occur.For example,if the cash flow occurs immediately enter a 0.If the cash flow occurs each year enter 1-5,etc.In column 4 enter the cash flow amount. $\begin{array}{|l|c|c|r|}\hline \text { Item Description } & \text { Inflow/Outflow } & \text { Years } & \text { Amount } \\\hline(\mathrm{CoL} \mathrm{1)} & (\mathrm{CoL} 2) & (\mathrm{CoL} 3) & (\mathrm{Col} .4) \\\hline \\\hline \\\hline \\\hline \\\hline \\\hline \\\hline \\\hline\end{array}$ 2)What is the initial outlay for this capital investment (the amount of the cash flow at time = 0)?
3)What is the amount of the annual net cash flow for this capital investment?
4)What is the net present value of the proposed venture? Should Janelle proceed?

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