Question

Jim Bingham is considering starting a small catering business. He would need to purchase a delivery van ($40,000) and equipment costing $65,000 to operate the business and another $60,000 for inventories and other working capital needs. Rent for the building to be used by the business will be $35,000 per year. Jim's marketing studies indicate that the annual cash inflow from the business will amount to $120,000. In addition to the building rent, annual cash outflow for operating costs will amount to $40,000. In years 1, 3 and 5 Jim will need to spend an additional $5,000 in advertising. In years 3 to 5 maintenance of $2,500 per year will need to be spent. Jim wants to operate the catering business for only six years. He estimates that the equipment could be sold at that time for 4% of its original cost. Jim uses a 10% discount rate; tax rate is 20%. The CCA rate for delivery van is 30% and the rate for equipment is 20%.

Required:

Determine the net present value. Should Jim start the business?

Answer 1