(Appendix 13A)Jim Bingham Is Considering Starting a Small Catering Business

question 55

Essay

(Appendix 13A)Jim Bingham is considering starting a small catering business.He would need to purchase a delivery van and equipment costing $125,000 to operate the business and another $60,000 for inventories and other working capital needs.Rent for the building to be 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.Jim uses a 16% discount rate.(Ignore income taxes in this problem. )
Required:
Would you advise Jim to make this investment? Use Net Present Value and Profitability analysis to support your decision.

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Definitions:

Conductor

A material or object that allows the flow of electrical current in one or more directions.

Magnetic Flux Density

Magnetic flux density is a measure of the strength and direction of a magnetic field at a particular point, expressed in teslas (T), indicating how dense the field lines are in that area.

Induced Voltage

A voltage generated in a conductor due to its motion in a magnetic field or due to a changing magnetic field around it.

Ampere-turns

A unit of magnetomotive force represented by the product of current (in amperes) and the number of turns in a coil, influencing the strength of the magnetic field generated.