What would the salvage value have to be a good investment

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Reference no: EM132797360

Vixen is considering starting a small catering business. She would need to purchase a delivery van and equipment costing $130,000 to operate the business and another $70,000 for inventories and other working capital needs. Rent for the building to be used by the business will be $35,000 per year. Vixen'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. Vixen wants to operate the catering business for only six years. At the end of year 6, the working capital investment would be recovered. Vixen uses a 16% discount rate. Ignore taxes.

Required:

Problem 1: Would you advise Vixen to make this investment? Show your calculations.

Problem 2: What is the IRR on this project?

Problem 3: Assume now that Vixen believes there will be some salvage value for the equipment, but she isn't sure how much. What would the salvage value have to be for this to be a good investment?

Reference no: EM132797360

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