A business investor is considering a new food venture on an isolated construction site. He has been given permission to operate on the site for a period of 15 years. He has compiled the following information about the new proposed business venture: Startup equipment: $450,000 Working capital required for new kitchen: $105,000 Expected annual cash inflow from food sales: $375,000 Expected annual cash expenses associated with the new business: $250,000 Restaurant upgrade required after 5 years: $55,000 At the end of the 15-year period, the equipment would be sold for its salvage value of $125,000. The company is required to pay taxes at the rate of 30%. It will calculate depreciation using the straight-line method, but it will not use the salvage value when computing depreciation for tax purposes. Required: a) Assuming a 15% after-tax cost of capital, compute net present value (NPV) of the new venture. b) On the basis of your computations should this business be opened or not.
A business investor is considering a new food venture on an isolated construction site. He has been given permission to operate on the site for a period of 15 years. He has compiled the following information about the new proposed business venture: Startup equipment: $450,000 Working capital required for new kitchen: $105,000 Expected annual cash inflow from food sales: $375,000 Expected annual cash expenses associated with the new business: $250,000 Restaurant upgrade required after 5 years: $55,000 At the end of the 15-year period, the equipment would be sold for its salvage value of $125,000. The company is required to pay taxes at the rate of 30%. It will calculate depreciation using the straight-line method, but it will not use the salvage value when computing depreciation for tax purposes. Required: a) Assuming a 15% after-tax cost of capital, compute net present value (NPV) of the new venture. b) On the basis of your computations should this business be opened or not.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
A business investor is considering a new food venture on an isolated construction site. He has been given permission to operate on the site for a period of 15 years. He has compiled the following information about the new proposed business venture:
Startup equipment: $450,000
Expected annual
Expected annual cash expenses associated with the new business: $250,000
Restaurant upgrade required after 5 years: $55,000
At the end of the 15-year period, the equipment would be sold for its salvage value of $125,000. The company is required to pay taxes at the rate of 30%. It will calculate
Required:
- a) Assuming a 15% after-tax cost of capital, compute
net present value (NPV) of the new venture. - b) On the basis of your computations should this business be opened or not.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 4 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education