Mark Stevens Is Considering Opening a Hobby and Craft Store

question 28

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:

Poison Pills

Strategies employed by companies to deter hostile takeovers, making the company less attractive to potential acquirers.

Takeover Attempt

An effort by one company to acquire control over another company, often by purchasing a significant portion of its stock.

Golden Parachutes

Contractual agreements that provide senior executives with significant benefits in the event that they are terminated as a result of a merger or takeover.

Discount Rate

The interest rate used to discount future cash flows to their present values, reflecting the time value of money and risk.