Judy Garland is planning to open a stall at the local mall, paying $2500 rent, in advance each month. She will buy $25,000 in costume jewelry as the initial inventory, and buy the display cases for $4000. She expects that the average sales per month will be $15,000, of which she will use $5000 to replenish her inventory. She will hire an assistant for $2000 a month. At the end of five years, she plans to sell the entire business, including inventory and display cases, for $30,000. Her income tax rate is 25% and she will use a discount rate of 12%. Assume that all the cash flows occur at the end of the month, except rent, and the taxes are due at the end of the year. Ignore depreciation and capital gains. Is it a worthwhile project?
To solve the problem, you may find the PV of the following cash flows:
1. Buy inventory and display cases
2. Pay rent to the mall, in advance, for 60 months
3. Claim tax benefit of rent paid
4. Sell jewelry and restock the inventory every month for 60 months
5. Pay income tax on income from item 4 every year
6. Pay salary to assistant, $2000 per month
7. Claim tax benefit of salary paid
8. Sell the business
9. NPV = sum of the above = $174,673
NOTE: PLEASE SHOW SOLUTIONS