12.) Bill Anders retires in 5 years. He would have to purchase equipment costing

Question

12.) Bill Anders retires in 5 years. He would have to purchase equipment costing $500,000 to equip the outlet and invest an additional $150,000 for inventories and other working capital needs. Other outlets in the fast-food chain have an annual net cash inflow of about $160,000. Mr. Anders would close the outlet in 5 years. He estimates that the equipment could be sold at that time for about 10% of its original cost and the working capital would be released for use elsewhere. Mr. Anders' required rate of return is 16%. Required: What is the investment's net present value? Is this an acceptable investment?

Explanation / Answer

Item Years Amount of cash Flow 16% Factor Present Value of Cash Flows Investment in equipment Now -500000 1 -500000 Investment in Cash Flows Now -150000 1 -150000 Annual Net Cash Inflows 8years 160000 4.344 695040 Salvage Value of Equipment 8th year 50000 0.305 15250 Working Capital Released 8th year 150000 0.305 45750 Net Present Value 106040 Yes, the outlet is an acceptable investment because its net present value is positive.

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