Mark Stevens Is Considering Opening a Hobby and Craft Store

Mark Stevens is considering opening a hobby and craft store. He would need $100,000 to equip the business and another $40,000 for inventories and other working capital needs. Rent for the building to be used by the business will be $24,000 per year. Mark estimates that the annual cash inflow from the business will amount to $90,000. In addition to building rent, annual cash outflow for operating costs will amount to $30,000. Mark plans to operate the business for only six years. He estimates that the equipment and furnishings could be sold at that time for 10% of their original cost. Mark uses a discount rate of 16%. (Ignore income taxes in this problem.)

Required:

Would you advise Mark to make this investment? Use the net present value method.

Correct Answer:

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Yes,Mark would be ad...

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