You are graduating in June and would like to start your own business making wine coolers. You collect the following information on the initial costs:
Cost of Plant & Equipment = $ 500000
Licensing & Legal Costs = $ 50000
You can claim an investment tax credit of 10% on plant & equipment. You also have been left a tidy inheritance that will cover the initial cost, and is currently invested in a CD 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 = $ 200000
Adding up state, local and federal 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.) 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/year for the next five years.). Should you take on the project?