Question

(Ignore income taxes in this problem.) Jane Summers has just inherited S640,000 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 $104,000 to equip the business and another $50,800 for inventories and other working capital needs. Rent on the building used by the business will be $25,200 per year. Jane's marketing studies indicate that the annual cash inflow from the business will amount to S92,000. In addition to the building rent, other annual cash outflows for operating costs will amount to $31,200. 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

Net present value

$1478

	Year(s)	Amount of Cash Flow	16% Factor	Present value of cash flows
Equipment	Now	(104000)	1.000	(104000)
Working capital required	Now	(50800)	1.000	(50800)
Building rent	1-6	(25200)	3.685	(92862)
Annual net cash inflow	1-6	60800	3.685	224048
Salvage value, equipment	6	10400	0.410	4264
Release of working capital	6	50800	0.410	20828
Net present value				$1478

Annual net cash inflow = 92000-31200 = 60800

Salvage value, equipment = 104000*10% = 10400