Question

I need help to solve this problem please with explanation as soon as possible.

UN L. Pus) Entrepreneurism is Everywhere You next walk along Richmond Road towards the stadium, which gets you thinking about games, but the concessions at Tribe Athletics leaves something to be d towards the stadium, which gets you thinking about Tribe Athletics. You love the nbe Athletics leaves something to be desired. You have a strong entrepreneurial spirit and su think that you could make money starting your own alternative concessio hey starting your own alternative concessions service that offers William and Mary-themed food (e.g.. TWOMP Tacos) and beverages (e... Tribe Bubble Tea). Tou paid $20,000 for a business plan last vear from a local firm. You revise the plan and quickly develop the following four-year proposal. Your concession stand would require an immediate invest 1 stand would require an immediate investment of $300,000 for equipment. You estimate that your stand would generate $90,000 in revenues in the each year. Your annual operating costs are expected to be 10% of your sales. You need $10,000 in working capital immediately, but you expect to recoup all of it in year 4. Your equipment can be depreciated straight line to its salvage value of $50,000 over 4 years. The relevant corporate tax rate is 30%. Your required return is 2.5%. A. (5 pts) Using a discounted cash flow analysis, decide if you should undertake this business venture. -oneriated cannoo

Answer 1

Outflow = "-" inflow = "+"

starting of year 1 = year 0

Equipment + Working Capital = 300000+10000 = -310,000

End of Year 1 to 4

Revenue = 90,000

operating cost = 10% of revenue = -9,000

Tax saving due to depreciation = 62,500*30% = -18,750

total = 90,000-9,000-18,750 = 62,250

PV to Year 0 = 62,250 * 3.762 = 2,34,184.5

End of year 4

initial investment recapture = 10,000

Sale of equipment = 50,000

total = 60,000

NPV = -310,000+234,184.5+60,000 = -15,815.5

Therefore you should not undertake this venture