Karen has been working with a small travel agency for the past few years to learn the business and to better understand what costs are necessary to run it. Now, having been in the business world for a few years, she's ready to start her own travel agency, specializing in "off the grid" locations. She knows there will be both overhead costs and labor costs, since she intends to hire one assistant. The following chart outlines her estimates thus far. Annual net operating cash flows³ Initial asset investment Asset life in years $3,800 $9,800 8 Salvage value of asset at end of useful life $1,000 Tax rate 25% a After assistant and overhead costs, but does not include a salary for Karen. As a new business owner, Karen only expects to earn a 5% rate of return. She conducted an initial NPV anlaysis for an 8-year interval, recognizing that she'll make some significant adjustments after that point. Her initial analysis revealed a positive NPV. Click here to view the factor table (a) Rerun the NPV analysis for Karen. Did she correctly determine a positive NPV related to her investment for this 8-year period? State the NPV amount. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answer to 2 decimal places e.g. 5,125.36. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) NPV $ Karen's calculations were
Karen has been working with a small travel agency for the past few years to learn the business and to better understand what costs are necessary to run it. Now, having been in the business world for a few years, she's ready to start her own travel agency, specializing in "off the grid" locations. She knows there will be both overhead costs and labor costs, since she intends to hire one assistant. The following chart outlines her estimates thus far. Annual net operating cash flows³ Initial asset investment Asset life in years $3,800 $9,800 8 Salvage value of asset at end of useful life $1,000 Tax rate 25% a After assistant and overhead costs, but does not include a salary for Karen. As a new business owner, Karen only expects to earn a 5% rate of return. She conducted an initial NPV anlaysis for an 8-year interval, recognizing that she'll make some significant adjustments after that point. Her initial analysis revealed a positive NPV. Click here to view the factor table (a) Rerun the NPV analysis for Karen. Did she correctly determine a positive NPV related to her investment for this 8-year period? State the NPV amount. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answer to 2 decimal places e.g. 5,125.36. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) NPV $ Karen's calculations were
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text:Karen has been working with a small travel agency for the past few years to learn the business and to better understand what costs
are necessary to run it. Now, having been in the business world for a few years, she's ready to start her own travel agency, specializing
in "off the grid" locations. She knows there will be both overhead costs and labor costs, since she intends to hire one assistant. The
following chart outlines her estimates thus far.
Annual net operating cash flows³
Initial asset investment
Asset life in years
$3,800
$9,800
8
Salvage value of asset at end of useful life
$1,000
Tax rate
25%
a After assistant and overhead costs, but does not include a salary for Karen.
As a new business owner, Karen only expects to earn a 5% rate of return. She conducted an initial NPV anlaysis for an 8-year interval,
recognizing that she'll make some significant adjustments after that point. Her initial analysis revealed a positive NPV.
Click here to view the factor table
(a)
Rerun the NPV analysis for Karen. Did she correctly determine a positive NPV related to her investment for this 8-year period?
State the NPV amount. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answer to 2 decimal places
e.g. 5,125.36. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
NPV
$
Karen's calculations were
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