should you buy the rights?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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1. You can purchase the right to sell beverages at sporting events for 3 years at a local minor league baseball stadium. The cost of the rights to sell the beverages costs $200,000. The first year you plan on selling 25,000 drinks at $5 each. They will cost you $3 each. The second and third years, you will sell 50,000 drinks at $5, but now your cost is only $2.50 each. You need to spend $5,000 each year no matter what for electricity (ie. this is a fixed cost of the project). You already paid $10,000 to get your food license. You can depreciate the cost of the rights over the three years (straight line) and your tax rate is 25%. With a require rate of return of 10%, should you buy the rights? (NOTE: If EBIT is less than zero, use zero for the amount of taxes. Ignore any loss carry-forward.)

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