Your friend would like some insights on how to evaluate new opportunities and thinks you could use a reality check. Thus, she presents some data and asks for recommendations. She has $500,000 in funds to use. Looking at her business, you discover the following opportunities:
option 1: Renovate her building at a cost of $500,000. This saves 10,000 gallons of fuel per year. Fuel currently costs $5.00 per gallon. She thinks this renovation will showcase her green building skills and will lead to increased sales of $100,000 per year for the next two years. Planning horizon is five years.
option 2: Lend another entrepreneur $380,000. This person, who she met at a local entrepreneur center event, promises to double her $380,000 in 2 years. This entrepreneur has a good track record on recent projects.
option 3: Repay her car loan for her recently acquired Jaguar. She borrowed $120, 000 for 5 years at 3.9% interest to buy this car and has not yet made a payment. She can sell this car for $107,000 today.
So, your friend would like some pre-tax advice (that means do not consider taxes or depreciation) on what and how to decide. You can also ignore inflation in your calculations. Again, she has $500,000 to use in this set of decisions. Make a recommendation that is supported by your calculations. Explain your strategy in detail.
Note: consider all possible alternatives using available $500,000 and state your recommendation for each alternative.