You would like to start your own business. You collect the following information on the...
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You would like to start your own business. You collect the following information on the initial costs:
Cost of Plant and Equipment = $ 500,000
Licensing and Legal Costs = $ 50,000
You can claim an investment tax credit of 10% on plant and equipment. You also have been left a tidy inheritance that will cover the initial cost, and your estimated opportunity cost is 10%. You estimate that you can sell 1 million bottles a year at $1 a bottle. You estimate your costs as follows:
Variable costs/bottle = 50 cents
Fixed Costs/ year = $ 200000
Adding up state, local, and federal taxes, you note that you will be in the 50% tax bracket.
A) To be conservative, you assume that you will terminate the business in 5 years and that you will get nothing from the plant and equipment as salvage (you also use straight line depreciation).
B) As a final consideration, you note that starting this business will mean that you will not be able to take the investment banking job you have been offered (which offered $ 75000 a year for the next 5 years). Should you take on the project?
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