(Ignore Income Taxes in This Problem

question 78

Essay

(Ignore income taxes in this problem.) Mark Stevens is considering opening a hobby and craft store. He would invest $50,000 to purchase equipment and furnishings and another $100,000 for inventories and other working capital needs. Rent on the building used by the business will be $25,000 per year. In addition to building rent, other annual cash outflows for operating costs will amount to $44,000. Mark estimates that the annual cash inflow from the business will amount to $100,000. Mark plans to operate the business for only six years. He estimates that the equipment and furnishings could be sold at that time for about 10% of its original cost. Mark's discount rate is 16%. All cash flows, except for the initial investment, would occur at the ends of the years.
Required:
Compute the net present value of this investment.

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Definitions:

Drawer

In a financial context, the person who writes or issues a check or draft instructing a bank to pay a specified sum of money to a designated party.

Liable

Legally responsible or obligated.

Promissory Note

A written and legally binding promise to pay a specific sum of money to a designated party at a specified time or on demand.

Endorsed

The act of signing one's name on the back of a document, typically a financial instrument, indicating approval or transfer of rights.