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.

To determine whether you should take on the project, we need to calculate the net present value (NPV) of the project. NPV helps determine if the project's expected cash flows will generate a higher return than the cost of investment.

The formula to calculate NPV is:
NPV = (Cash Flow / (1+r)^n) - Initial Investment

Where:
Cash Flow = Expected annual cash inflow
r = Discount rate (opportunity cost of capital)
n = Number of years
Initial Investment = Total initial cost

In this case, the initial investment includes the cost of plant & equipment ($500,000) and licensing & legal costs ($50,000), which sum up to $550,000.

To calculate the expected annual cash inflow, we need to multiply the number of bottles sold per year by the selling price per bottle, and then subtract the variable cost per bottle. So,
Expected Annual Cash Inflow = (Number of bottles sold) x (Selling price per bottle - Variable cost per bottle)

Given that you estimate selling one million bottles a year at $1 per bottle and have variable costs of 50 cents per bottle, the expected annual cash inflow would be:
Expected Annual Cash Inflow = (1,000,000) x ($1 - $0.50) = $500,000

The fixed costs per year are $200,000.

Now, let's calculate the net annual cash inflows by subtracting the fixed costs from the expected annual cash inflow:
Net Annual Cash Inflow = Expected Annual Cash Inflow - Fixed Costs = $500,000 - $200,000 = $300,000

Since you mentioned that you will terminate the business in five years and there won't be any salvage value, we will consider the project's duration as five years.

Next, we need to determine the discount rate or opportunity cost of capital. In this case, we can use the 10% interest earned on the bank account inheritance as an appropriate discount rate.

Using the NPV formula, we can calculate the NPV as follows:
NPV = ($300,000 / (1+0.10)^1) + ($300,000 / (1+0.10)^2) + ($300,000 / (1+0.10)^3) + ($300,000 / (1+0.10)^4) + ($300,000 / (1+0.10)^5) - $550,000

Calculating each term:
NPV = ($300,000 / 1.10) + ($300,000 / 1.10^2) + ($300,000 / 1.10^3) + ($300,000 / 1.10^4) + ($300,000 / 1.10^5) - $550,000

Simplifying:
NPV = $272,727.27 + $248,016.53 + $225,469.57 + $204,972.33 + $186,338.48 - $550,000

Adding all the terms:
NPV = $1,137,523.18 - $550,000
NPV = $587,523.18

Since the NPV is positive ($587,523.18), it indicates that the project is expected to generate a higher return than the cost of investment. Therefore, based on the provided information, you should consider taking on the project.