Question

• You are from somewhere a bit farther North than Dallas and you have just realized that Dallas is a special kind of hot during the summer. You think that a great business idea is to open a snow shack. You decide that for the next four years you will sell snow cones in the summer. You have $10,000 to invest in the snow cone shack. You expect the business venture will cost $10,000 to open and start selling snow cones. You expect toe earn $3,000 each year from this business (Annual cash in-flows of $3,000). After the 4 years are up and you graduate, you think you can sell your snow shack business for $8,000. If you choose to not open a snow cone shack, you will invest your $10,000 for the entire 4 years at a rate of return (i.e.- interest rate) of 15%. Should you invest in the snow cone shack? What if you only make $2,000 per year?

Answer 1

1.
Should you invest in the snow cone shack?
NPV=-10000+3000/15%*(1-1/1.15^4)+8000/1.15^4=3138.96

Yes Invest as NPV is positive

2.
What if you only make $2,000 per year?
NPV=-10000+2000/15%*(1-1/1.15^4)+8000/1.15^4=283.98

Yes Invest as NPV is positive