If you could generate 30,000 yearly for the next five years with the initial investment of 120,000 however?

Question

oppportunity cost of funds is 6%. Is it worth it.

Answer 1

I agree with the risk comment. That is a LOT of money to be investing. Profit projections can't be accurate past 6 months. How are you to know what the world/market is going to be like in 1 year - 2 years - 5 years? $30,000/year doesn't sound like much of a return on that investment.

Answer 2

Absolutely not. This is a horrible deal, and I will give the math behind it.

First, I have an MBA. I am purposefully speaking in general terms because I do not know your background. If you want more information I highly recommend Philip Vacarro's book on Operation Management as it contains all the formulas necessary to evalute these types of problems.

Problem overview, invest 120k today for 30k for the next five years. If there was absolutely no risk, you would receive 150k in return. This means that after the fifth year you would receive a profit of 30k (150k - 120k). Since this took five years to create the average annual Return on Investment is only 5%. (30k / 120k / 5 ). Furthermore, the return is also taxed so you are not even actually earning the full 5%!

Depending on your region, there are government backed municipal bonds which have virtually no risk, no tax and offer a substantially better return than what is offered here.

Since you mention opportunity cost of 6%, this sounds like a textbook problem. If that is the case, you should also refuse this because you are tying up the capital for five years and thus preventing you from pursuing a better option which may occur later. Furthermore, you could discuss NPV of the year 6 $150k which will make the option even worse.

Cheers,

Leo

Answer 3

Mathematically, sure, it's a good deal. BUT.....

I wouldn't touch it with a ten-foot pole! The old adage, "if it sounds too good to be true, it is" applies here. What is the guarantee that you'd actually get the $30,000 yearly? Somebody's promise? uh-huh. That'll happen.

Answer 4

you have to weigh the industry trends and market variables to decide whether the business can actually generate $30,000 annually. On paper it looks good.

Answer 5

There's not enough information to answer the question. It all depends on how much risk is involved.

Answer 6

do the math, of course it is. a net return of around 18%--just call me VISA!

Answer 7

looks like you would make 22k per yr