Vanessa Jacobs is considering opening a baking supply store. She would need $140,000 to equip the business and another $65,000 for inventory and working capital requirements. Rent on the building used by the store will be $28,000 per year. Vanessa estimates that the annual cash inflow from the business will amount to $95,000. In addition to building rent, annual cash outflow for operating costs will amount to $37,000. Vanessa plans to operate the business for seven years. She estimates that the equipment and other capital assets could be sold in seven years for 10% of their original cost. The working capital will be fully released for other purposes at the end of the seven-year project. Vanessa uses a discount rate of 14%. Required: Would you advise Vanessa to make this investment? Use the net present value method. The present value tables are attached for your reference.
Vanessa Jacobs is considering opening a baking supply store. She would need $140,000 to equip the business and another $65,000 for inventory and working capital requirements. Rent on the building used by the store will be $28,000 per year. Vanessa estimates that the annual cash inflow from the business will amount to $95,000. In addition to building rent, annual cash outflow for operating costs will amount to $37,000. Vanessa plans to operate the business for seven years. She estimates that the equipment and other capital assets could be sold in seven years for 10% of their original cost. The working capital will be fully released for other purposes at the end of the seven-year project. Vanessa uses a discount rate of 14%. Required: Would you advise Vanessa to make this investment? Use the net present value method. The present value tables are attached for your reference.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Transcribed Image Text:Vanessa Jacobs is considering opening a baking supply store. She would need $140,000 to equip the business and
another $65,000 for inventory and working capital requirements. Rent on the building used by the store will be
$28,000 per year. Vanessa estimates that the annual cash inflow from the business will amount to $95,000. In
addition to building rent, annual cash outflow for operating costs will amount to $37,000. Vanessa plans to operate
the business for seven years. She estimates that the equipment and other capital assets could be sold in seven
years for 10% of their original cost. The working capital will be fully released for other purposes at the end of the
seven-year project. Vanessa uses a discount rate of 14%.
Required:
Would you advise Vanessa to make this investment? Use the net present value method.
The present value tables are attached for your reference.
Present Value of $1:
Perlod
4%
5%
6%
8%
10%
12%
14%
16%
18%
20%
22%
24%
26%
1
0.962 0.952 0.943
0.926
0.909
0.893 0.877
0.862
0.847
0.833
0.820
0.806
0.794
0.925
0.907 0.890
0.857
0.826
0.797
0.769
0.743
0.718
0.694
0.672
0.650
0.630
Go
3
0.889
0.864 0.840
0.794
0.751
0.712
0.675
0.641
0.609
0.579
0.551
0.524
0.500
Transcribed Image Text:Present Value of $1:
14%
16%
18%
20%
22%
24%
26%
Perlod
4%
5%
6%
8%
10%
12%
0.893
0.877
0.862
0.847
0.833
0.820
0.806
0.794
1
0.962 0.952
0.943
0.926
0.909
0.826
0.797
0.769
0.743
0.718
0.694
0.672
0.650
0.630
0.925 0.907
0.890 0.857
3.
0.889 0.864
0.840 0.794
0.751
0.712 0.675
0.641
0.609
0.579
0.551
0.524
0.500
4
0.855 0.823
0.792 0.735
0.683
0.636 0.592
0.552
0.516
0.482
0.451
0.423
0.397
0.822
0.784
0.747 0.681
0.621
0.567
0.519
0.476
0.437
0.402
0.370
0.341
0.315
0.790
0.746
0.705
0.630
0.564
0.507
0.456
0.410
0.370
0.335
0.303
0.275
0.250
7
0.760
0.711
0.665 0.583
0.513
0.452
0.400
0.354
0.314
0.279
0.249
0.222
0.198
8
0.731
0.677
0.627
0.540
0.467
0.404
0.351
0.305
0.266
0.233
0.204
О.179
0.157
9.
0.703
0.645 0.592 0.500
0.424
0.361
0.308
0.263
0.225
0.194
0.167
О.144
0.125
10
0.676
0.614
0.558 0.463
0.386
0.322
0.270
0.227
0.191
0.162
0.137
0.116
0.099
11
0.650
0.585
0.527 0.429 0.350
0.287
0.237 0.195
0.162
0.135
0.112
0.094
0.079
12
0.625 0.557 0.497 0.397 0,319
0.257
0.208
0.168
О.137
0.112
0.092
0.076
0.062
13
0.601 0.530 0.469 0.368 0.290 0.229
0.182
0.145
0.116
0.093
0.075
0.061
0.050
14
0.577
0.505 0.442 0.340
0.263
0.205
0.160
0.125
0.039Activ
Go to
0.099
0.078
0.062
0.049
15
0.555
0.481
0.417 0.315
0.239
0.183
0.140
0.108
0.084
0.065
0.051
0.040
0.031
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