posted by RICKY on .
You are graduating in September and would like to start your own business making wine coolers. You collect the following information on the initial costs:
Cost of Plant & Equipment = $500,000
Licensing & Legal Costs = $50,000
You also have been left a tidy inheritance that will cover the initial cost, and is currently invested in a bank account earning 10%. You estimate that you can sell one million bottles a year at $1/bottle. You estimate your costs as follows:
Variable costs/bottle = 50 cents
Fixed Costs/ year = $ 200,000
Adding up state and local taxes, you note that you will be in the 50% tax bracket. To be conservative, you assume that you will terminate the business in five years and that you will get nothing from the plant and equipment as salvage (you also use straight line depreciation.). Should you take on the project? (show all the calculation)
1 million bottles at $1 a bottle is $1 million minus 50 cents a bottle is $500,000 minus $200,000 fixed costs per year is $300,000 minus $150,000 in taxes is $150,000 left plus 10% per year from the bank is $165,000 times 5 years is $825,000 made. I would do it.