Bill Anders is considering investing in a franchise in a fast-food chain. He would have to purchase equipment costing $420,000 to equip the outlet and invest an additional $30,000 for inventories and other working capital needs. Other outlets in the fast-food chain have an annual net cash inflow of about $120,000. 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 8%. (Ignore income taxes.)Refer to Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using the tables provided.Required:What is the investment's net present value? Is this an acceptable investment?

What will be an ideal response?



    Year
  Now  1-5  5 
Initial investment$(420,000)      
Working capital$(30,000)   $30,000 
Annual net cash flow   $120,000    
Salvage value      $42,000 
Total cash flows (a)$(450,000)$120,000 $72,000 
Discount factor (8%) (b) 1.000  3.993   0.681 
Present value of cash flows (a) × (b)$(450,000)$479,160 $49,032 
Net present value$78,192       
Yes, the outlet is an acceptable investment because its net present value is positive.

Business

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