Mr. Grayson is considering giving up his paid employment and going into business on his own account. He is considering buying a quarry pit with a “life” of about 35 years. To purchase this business, he would have to pay sh 4,750,000 now. Mr. Grayson wishes to retire in 20 years’ time. He predicts that the net cash operating receipts from this business will be sh 1,250,000 per annum for the first 15 years and sh 1,000,000 per annum for the last 5 years. He thinks that the business could be sold at the end of the 20 year period for sh 1,500,000. Additionally, he estimates that certain capital replacements and improvements would be necessary and this should amount to sh 1000,000 per annum for the first 5 years; sh 150,000 per annum for the next 5 years, sh 200,000 per annum for the next 7 years and nothing for the last three years. This expenditure would be incurred at the start. Mr. Grayson has excluded any compensation to himself from the above data. If he should purchase the business, however, he would have to leave his present job in which he earns sh 500,000 a year. To finance the purchase of this business, he would have to realize his present savings which are invested to yield a return of 10 per cent before tax, and have a comparable risk factor. Required Advise Mr. Grayson as to whether or not it is advisable to purchase the business in the light of the information given. Ignore Income Tax.
Mr. Grayson is considering giving up his paid employment and going into business on his own account. He is considering buying a quarry pit with a “life” of about 35 years. To purchase this business, he would have to pay sh 4,750,000 now. Mr. Grayson wishes to retire in 20 years’ time. He predicts that the net cash operating receipts from this business will be sh 1,250,000 per annum for the first 15 years and sh 1,000,000 per annum for the last 5 years. He thinks that the business could be sold at the end of the 20 year period for sh 1,500,000. Additionally, he estimates that certain capital replacements and improvements would be necessary and this should amount to sh 1000,000 per annum for the first 5 years; sh 150,000 per annum for the next 5 years, sh 200,000 per annum for the next 7 years and nothing for the last three years. This expenditure would be incurred at the start.
Mr. Grayson has excluded any compensation to himself from the above data. If he should purchase the business, however, he would have to leave his present job in which he earns sh 500,000 a year. To finance the purchase of this business, he would have to realize his present savings which are invested to yield a return of 10 per cent before tax, and have a comparable risk factor.
Required
Advise Mr. Grayson as to whether or not it is advisable to purchase the business in the light of the information given. Ignore Income Tax.
Step by step
Solved in 5 steps with 3 images
