You are thinking of starting a business. You would finance it with 60% equity and 40%...

You are thinking of starting a business. You would finance it with 60% equity and 40% debt.

Relevant rates are as follows:

Small business tax rate 18.62% Risk free rate 4% Your pre-tax borrowing rate 9.216% Expected return on stock market 12%

You estimate that your firm’s β (beta) will be 0.75.

The business you are thinking of starting is a house painting business. You hired a FINA2710 graduate to develop cash flow estimates for you and you have paid that FINA 2710 grad $300 for their work. They estimated that you would need to purchase a truck. You could buy a truck for $18,000, and it would have a capital cost allowance (CCA) rate of 30%. You would also need to establish a $250 inventory of rollers and brushes. The estimated annual pre-tax net operating cash inflow is $9,500.

a) What is the Net Present Value (NPV) of starting the business, operating it for 2 years, and after that keeping the truck but not the inventory?

b) What is the NPV of starting the business, operating it for 2 years, and then winding up all aspects of the business, including selling the truck for $10,000? (The business has no othet automotive assets). Show your calculations.

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ekkarill92 answered 1 year ago

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