Jim Bingham Is Considering Starting a Small Catering Business

Jim Bingham is considering starting a small catering business. He would need to purchase a delivery van and equipment costing $125,000 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. 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 16% discount rate. (Ignore income taxes in this problem.)

Required:

Would you advise Jim to make this investment? Use Net Present Value and Profitability analysis to support your decision.

Correct Answer:

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P.I.= (125,000 + 60,000 + 7475)/(125,000...

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