Suppose that you and your four siblings are given an opportunity to purchase a video rental store. Each of you would put up $50,000 . The revenue from the store is expected to remain $350,000 per year for the next several years
The costs (not including the opportunity costs of your investment) of operating the store are expected to remain steady at $320,000 for the next several years. The current market rate of interest is 5 percent per year. Should you go in on this deal? Explain.
The expected profit from the store is $30,000 per year. If the profits are divided equally among the five partners, this amounts to $6,000 per year. This is a 12 percent rate of return on the initial $50,000 investment. Since the expected rate of return is greater than the market rate of interest, you should go in on the deal.
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