A business investor is considering a new food venture on an isolated construction site. He has...

A business investor is considering a new food venture on an isolated construction site. He has been given permission to operate on the site for a period of 15 years. He has compiled the following information about the new proposed business venture:

Startup equipment: $450,000

Working capital required for new kitchen: $105,000

Expected annual cash inflow from food sales: $375,000

Expected annual cash expenses associated with the new business: $250,000

Restaurant upgrade required after 5 years: $55,000

At the end of the 15-year period, the equipment would be sold for its salvage value of $125,000. The company is required to pay taxes at the rate of 30%. It will calculate depreciation using the straight-line method, but it will not use the salvage value when computing depreciation for tax purposes.

Required:

a) Assuming a 15% after-tax cost of capital, compute net present value (NPV) of the new venture.

b) On the basis of your computations should this business be opened or not.

Expert Solution

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ekkarill92 answered 2 years ago

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