You have some cash and the opportunity to buy a small retail store downtown for $700,000. This price includes all physical assets in the retail store and the inventories. You also have the option of buying $700,000 of mutual funds that pay 14% interest. The annual cash flow from the retail store operations is expected to be $115,000. In 20 years you plan to retire, and you feel that the store will be sold then for $2 million. If you wanted to make the same return on your investment as you would with the investment securities, would you buy the retail store?
To answer this question, calculate the following:
1. Payback period
2. Net present value
3. Internal rate of return
4. Profitability index