Reference no: EM133068432
Question - Steve is planning to set up a new "buy now pay later" business given its popularity in Australia. The aim of the business is to provide credit-line and easy repayments to its customers when purchasing goods and services. Steve had carried out his own research which cost him $15,000 and managed to finalize the following information.
The total set-up cost is $275,000 which includes the $200,000 purchase of several powerful computers. The remaining amount goes to pay for special software and subscriptions.
For tax purposes, all the computers are required to be fully depreciated straight-line over the next five years.
Steve intends to exit the business at the end of year 4. At that time, Steve expects to sell the computers for $46,000.
Rent, electricity, advertising, wages, and other expenses are $33,000 a year.
A working capital investment of $11,000 is required immediately to undertake the business. The working capital will be recovered at the end of the business.
Also, Steve will have to give up his current job as a junior analyst at Credit Suisse, which pays $66,000 per year.
The revenue will come from charging retailers that opt for the services. Steve estimates that the annual number of retailers will be constant at 650 for the next four years with the average monthly gross profit of $25 per retailer.
The business is in the 30% tax bracket, and has a cost of capital of 9% per annum.
Required -
A. What are the annual Free Cash Flows for the business?
B. What is the NPV of this project? Should Steve give up his job and invest in this business?
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