Vanessa Jacobs is considering opening a baking supply store. She would need $140,000 to equip the business andanother $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. Inaddition to building rent, annual cash outflow for operating costs will amount to $37,000. Vanessa plans to operatethe business for seven years. She estimates that the equipment and other capital assets could be sold in sevenyears for 10% of their original cost. The working capital will be fully released for other purposes at the end of theseven-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:Perlod4%5%6%8%10%12%14%16%18%20%22%24%26%10.962 0.952 0.9430.9260.9090.893 0.8770.8620.8470.8330.8200.8060.7940.9250.907 0.8900.8570.8260.7970.7690.7430.7180.6940.6720.6500.630Go30.8890.864 0.8400.7940.7510.7120.6750.6410.6090.5790.5510.5240.500 Present Value of $1:14%16%18%20%22%24%26%Perlod4%5%6%8%10%12%0.8930.8770.8620.8470.8330.8200.8060.79410.962 0.9520.9430.9260.9090.8260.7970.7690.7430.7180.6940.6720.6500.6300.925 0.9070.890 0.8573.0.889 0.8640.840 0.7940.7510.712 0.6750.6410.6090.5790.5510.5240.50040.855 0.8230.792 0.7350.6830.636 0.5920.5520.5160.4820.4510.4230.3970.8220.7840.747 0.6810.6210.5670.5190.4760.4370.4020.3700.3410.3150.7900.7460.7050.6300.5640.5070.4560.4100.3700.3350.3030.2750.25070.7600.7110.665 0.5830.5130.4520.4000.3540.3140.2790.2490.2220.19880.7310.6770.6270.5400.4670.4040.3510.3050.2660.2330.204О.1790.1579.0.7030.645 0.592 0.5000.4240.3610.3080.2630.2250.1940.167О.1440.125100.6760.6140.558 0.4630.3860.3220.2700.2270.1910.1620.1370.1160.099110.6500.5850.527 0.429 0.3500.2870.237 0.1950.1620.1350.1120.0940.079120.625 0.557 0.497 0.397 0,3190.2570.2080.168О.1370.1120.0920.0760.062130.601 0.530 0.469 0.368 0.290 0.2290.1820.1450.1160.0930.0750.0610.050140.5770.505 0.442 0.3400.2630.2050.1600.1250.039ActivGo to0.0990.0780.0620.049150.5550.4810.417 0.3150.2390.1830.1400.1080.0840.0650.0510.0400.031

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.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 1eM

See similar textbooks

Similar questions

A restaurant is considering the purchase of new tables and chairs for their dining room with an initial investment cost of $515,000, and the restaurant expects an annual net cash flow of $103,000 per year. What is the payback period?
Your company is planning to purchase a new log splitter for is lawn and garden business. The new splitter has an initial investment of $180,000. It is expected to generate $25,000 of annual cash flows, provide incremental cash revenues of $150,000, and incur incremental cash expenses of $100,000 annually. What is the payback period and accounting rate of return (ARR)?
A grocery store is considering the purchase of a new refrigeration unit with an Initial Investment of $412,000, and the store expects a return of $100,000 in year one, $72000 in years two and three, $65,000 in years four and five, and $38,000 in year six and beyond, what is the payback period?
Bouvier Restaurant is considering an investment in a grill that costs $140,000, and will produce annual net cash flows of $21,950 for 8 years. The required rate of return is 6%. Compute the net present value of this investment to determine whether Bouvier should invest in the grill.
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
The Ham and Egg Restaurant is considering an investment in a new oven that has a cost of $60,000, with annual net cash flows of $9,950 for 8 years. The required rate of return is 6%. Compute the net present value of this investment to determine whether or not you would recommend that Ham and Egg invest in this oven.
Manzer Enterprises is considering two independent investments: A new automated materials handling system that costs 900,000 and will produce net cash inflows of 300,000 at the end of each year for the next four years. A computer-aided manufacturing system that costs 775,000 and will produce labor savings of 400,000 and 500,000 at the end of the first year and second year, respectively. Manzer has a cost of capital of 8 percent. Required: 1. Calculate the IRR for the first investment and determine if it is acceptable or not. 2. Calculate the IRR of the second investment and comment on its acceptability. Use 12 percent as the first guess. 3. What if the cash flows for the first investment are 250,000 instead of 300,000?
Mariam Alikozay is considering opening a cold storage refrigeration business. She would invest $50,000 to purchase equipment and furnishings and another $100,000 for inventories and other working capital needs. Rent on the building used by the business will be $25,000 per year. In addition to building rent, other annual cash outflows for operating costs will amount to $44,000. She estimates that the annual cash inflow from the business will amount to $100,000. Mariam plans to operate the business for only six years. She estimates that the equipment and furnishings could be sold at that time for about 10% of its original cost. The discount rate is 16%. Compute the net present value of this investment. Please post in word , not picture
Mariam Alikozay is considering opening a cold storage refrigeration business. She would invest $50,000 to purchase equipment and furnishings and another $100,000 for inventories and other working capital needs. Rent on the building used by the business will be $25,000 per year. In addition to building rent, other annual cash outflows for operating costs will amount to $44,000. She estimates that the annual cash inflow from the business will amount to $100,000. Mariam plans to operate the business for only six years. She estimates that the equipment and furnishings could be sold at that time for about 10% of its original cost. The discount rate is 16%. Compute the net present value of this investment.
Jim Bingham is considering starting a small catering business. He would need to purchase a delivery van and various equipment costing $150,000 to equip the business and another $60,000 for inventories and other working capital needs. Rent for the building used by the business will be $30,000 per year. Jim's marketing studies indicate that the annual cash inflow from the business will amount to $125,000. In addition to the building rent, annual cash outflow for operating costs will amount to $50,000. Jim wants to operate the catering business for only five years. He estimates that the equipment could be sold at that time for 10% of its original cost. The working capital will be fully released for other purposes at the end of the six years. Jim uses a 14% discount rate. needed; Would you advise Jim to make this investment?
Murad is considering starting a small catering business. He would need to purchase a delivery van and various equipment costing $62,500 to equip the business and another $30,000 for working capital needs. Rent for the building used by the business will be $17,500 per year. In addition to the building rent, annual cash outflow for operating costs will amount to $20,000. Murads marketing studies indicate that the annual cash inflow from the business will amount to $60,000. All of working capital would be released at the end of 7 years. Murad wants to operate the catering business for only seven years. He estimates that the equipment could be sold at that time for 5% of its original cost. Murad uses a 13% discount rate. Use the following present value tables, to determine the appropriate discount factor(s) Present Value of $1; 1 (1 +r) Periods S% 9% 10% 11% 16% 17% 0.572 0.5520.534 0.497 0.476 0.456 0.630 0.596 0.564 0.535 0.507 0.480 0.456 0.432 | 0.410 0.390 12% 13% 14% 15% 0.735 0.708…
Mark Stevens is considering opening a hobby and craft store. He would invest $50,000 to purchase equipment and furnishings and another $100,000 for inventories and other working capital needs. Rent on the building used by the business will be $25,000 per year. In addition to building rent, other annual cash outflows for operating costs will amount to $44,000. Mark estimates that the annual cash inflow from the business will amount to $100,000. Mark plans to operate the business for only six years. He estimates that the equipment and furnishings could be sold at that time for about 10% of its original cost. Mark's discount rate is 16%. All cash flows, except for the initial investment, would occur at the ends of the years. Required: Compute the net present value of this investment.