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. You must show all working
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
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
the salvage value when computing depreciation for tax purposes.
Required:
a) Assuming a 15% after-tax cost of capital, compute
b) On the basis of your computations should this business be opened or not.
You must show all working
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