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solution

Your new business idea has start-up costs of $600,000 and will generate revenues of $400,000 per year for four years. You were very careful in making your revenue projections. The business has operating costs of $200,000 per year which includes salary for you. You used straight-line depreciation (accelerated depreciation is not allowed for this project), included working capital needs, and used the correct tax rate (50%). You borrowed half of the start-up money from the bank at an interest rate of 8% (already corrected for the tax deductibility of debt) and you got the rest of the start-up costs from your friends and your family. You did a net present value to see if the business was viable (could repay the bank loan):

NPV = -$300,000 + $175,000(4yr., 8% annuity) = +279,618

Where the annual CF = $175,000 based on the information provided.

Given that NPV, should you start this business? Explain.

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