Question

(Ignore income taxes in this problem.) Jane Summers has just inherited S720.000 from her mother's estate. She is considering investing part of these funds in a small catering business. She would need to purchase a delivery van and various equipment costing S112,000 to equip the business and another $52.400 for inventories and other working capital needs. Rent on the building used by the business will be $27,600 per year. Jane's marketing studies indicate that the annual cash inflow from the business will amount to 596,000. In addition to the building rent, other annual cash outflows for operating costs will amount to $33,600. Jane wants to operate the catering business for only six years. She estimates that the equipment could be sold at that time for about 10% of its original cost. Jane's required rate of return is 16%. Required: Compute the net present value of this investment. (Input the amount as a positive value. Round "PV Factor" to 3 decimal places. Round your other intermediate calculations and final answers to the nearest whole dollar.) (Use Exhibit 11B-1, Exhibit 11B-2) Net present value S

Answer 1

1)
	Calculation Of Net Present Value
	Year	Particular	Cash Flow	PV Factor	PV Of Cash Flow
	a	b	c	d	e=c*d
	0	VAN ,Equip+ Working Capital	$       -1,64,400	1	$           -1,64,400
	1	Annual Inflow- rent -operating cost	$             34,800	0.862	$                 29,998
	2	Annual Inflow- rent -operating cost	$             34,800	0.743	$                 25,856
	3	Annual Inflow- rent -operating cost	$             34,800	0.641	$                 22,307
	4	Annual Inflow- rent -operating cost	$             34,800	0.552	$                 19,210
	5	Annual Inflow- rent -operating cost	$             34,800	0.476	$                 16,565
	6	Annual Inflow- rent -operating cost	$             34,800	0.410	$                 14,268
	6	Salvage Value	$             11,200	0.410	$                   4,592
	6	Release Of Working Capital	$             52,400	0.410	$                 21,484
		NPV			$               -10,120
		Alternative Answer
	A	Estimated Annual Cash Flow	$             34,800
	B	PV Annuity Factor (6 years,16%)	3.68500
	C	Present Value Of Cash Flow (A*B)	$   1,28,238.00
	D	Residual Value+ Release Of Working Capital	$             63,600
	E	PV Factor at year 6	0.4100
	F	PV of Salvage Value + WC (D*E)	$       26,076.00
	G	Initial Investment	$         1,64,000
	H	Net Present Value (C+F-G))	$             -9,686
	Note: The difference in answer is due to rounded off the PV factor.
	2)	Amount Can Be Withdrwan Each year = Amount / PVAF for 19% ,8 years
		=$24186/3.9543
		=$6117
		Correct Option: FIRST