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

question 136

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.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?
$$\begin{array} { | l | c | c | c | } \hline \text { Item Description } & \text { Inflow/Outflow } & \text { Years } & \text { Amount } \\\hline \text { (Col 1) } & \text { (Col 2) } & \text { (Col 3) } & \text { (Col 4) } \\\hline & & & \\\hline & & & \\\hline & & & \\\hline & & & \\\hline & & & \\\hline & & & \\\hline & & & \\\hline & & & \\\hline & & & \\\hline & & & \\\hline\end{array}$$

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Definitions:

Critical Thinking

involves the objective analysis and evaluation of an issue in order to form a judgment.

Defensible

Defensible refers to something that can be supported or maintained with evidence, making it justifiable in the face of scrutiny or challenge.

Scientific Reasoning

Refers to the methodological approach of using empirical data, observations, and experiments to form hypotheses and conclusions.

Problem Identification

The process of recognizing and defining an issue or challenge that requires resolution.