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

question 14

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.
(PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.)
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.
$$\begin{array} { | l | c | c | c | } \hline \text { Item Description } & \text { Inflow/Outflow } & \text { Years } & \text { Amount } \\\hline\text { (Col. 1) } & \text { (Col. 2) } & \text { (Col. 3) } & \text { (Col. 4) } \\\hline & & & \\\hline & & & \\\hline & & & \\\hline & & & \\\hline & & & \\\hline & & & \\\hline\end{array}$$
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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Definitions:

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