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Ovechkin Ltd. is considering starting a small catering business. He 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. Ovechkins 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. Ovechkin wants to operate the catering business for only six years. At the end of year 6, the working capital investment would be recovered. Ovechkin uses a 16% discount rate. Ignore taxes.

Required:

1. Would you advise Ovechkin to make this investment based on NPV? Show your calculations. (7 marks)
2. What is the IRR on this project? (1 mark)
3. Assume now that Ovechkin believes there will be some salvage value for the equipment, but he isnt sure how much. What would the salvage value have to be for this to be a good investment? (2 marks)
4. Ignoring requirement 3, assume that Ovechkin believes there will be additional annual cash inflows that have not been considered above related to his celebrity status. How much would those additional annual cashflows have to be to justify this investment? (2 marks)

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