(Ignore Income taxes in this problem.) Jim Bingham is considering starting a small catering business. He would need to purchase a delivery van and various equipment costing $125,000 to equip the business and another $60,000 for inventories and other working capital needs. Rent for the building used by the business will be $35,000 per year. Jim's marketing studies indicate that annual cash inflow from the business will amount to $120,000. In addition to building rent, annual cash outflow for operating costs will amount to $40,000. Jim wants to operate the catering business for only six years. He estimates that the equipment could be sold at the time for 4% of its original cost. Jim uses a 16% discount rate.
Would you advise Jim to make this investment? Why or why not? Show your work!
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