Please Help
I buy Widgets from a wholesaler at $3.50 each and sell them from my store in a strip mall for $10.00. It costs $1.50 to ship them to my store, so I clear $5.00 per Widget. Demand for my Widgets is 50,000 units, so my Gross Profits are $250,000/ year. According to a trade organization, Price Elasticity models show if I could sell them for $8.00, I could sell 100,000 units. I'd only make $3.00 per unit, but my gross profit would increase to $300,000. However, the increase in market share would eventually translate to more sales when customers return to buy new Widgets to replace their worn out Widgets. The risk of this model being wrong is very low since stores in other states have experienced similar volume increases. With a sizeable investment, I could practically eliminate the shipping costs, and I know I could make them cheaper if I had the equipment. I would have to buy $50,000 in raw materials. Land about a mile away is available for $150,000 and it would cost $350,000 for the equipment and a building. My shipping costs would drop to only 15 cents per Widget, and my cost per unit would only be $1.00. I'm not good a financial stuff, so a $550,000 up front cost doesn't seem worth it to me, so I've asked you for your opinion. The Building and Equipment depreciate over 5 years with a salvage value of $250,000. The land would appreciate in value to 275,000 . My tax rate is 25% and I can get a loan at 3.8% and my Money Market Savings Account earns 1.29% For the terminal cash flow, assume I will have and can sell my raw materials for the same $50,000. This is not an annual expense since the cost of this material is in the Cost of Goods Sold (Cost per Widget). What do you think? Should I do it? I buy Widgets from a wholesaler at $3.50 each and sell them from my store in a strip mall for $10.00. It costs $1.50 to ship them to my store, so I clear $5.00 per Widget. Demand for my Widgets is 50,000 units, so my Gross Profits are $250,000/ year. According to a trade organization, Price Elasticity models show if I could sell them for $8.00, I could sell 100,000 units. I'd only make $3.00 per unit, but my gross profit would increase to $300,000. However, the increase in market share would eventually translate to more sales when customers return to buy new Widgets to replace their worn out Widgets. The risk of this model being wrong is very low since stores in other states have experienced similar volume increases. With a sizeable investment, I could practically eliminate the shipping costs, and I know I could make them cheaper if I had the equipment. I would have to buy $50,000 in raw materials. Land about a mile away is available for $150,000 and it would cost $350,000 for the equipment and a building. My shipping costs would drop to only 15 cents per Widget, and my cost per unit would only be $1.00. I'm not good a financial stuff, so a $550,000 up front cost doesn't seem worth it to me, so I've asked you for your opinion. The Building and Equipment depreciate over 5 years with a salvage value of $250,000. The land would appreciate in value to 275,000 . My tax rate is 25% and I can get a loan at 3.8% and my Money Market Savings Account earns 1.29% For the terminal cash flow, assume I will have and can sell my raw materials for the same $50,000. This is not an annual expense since the cost of this material is in the Cost of Goods Sold (Cost per Widget). What do you think? Should I do it
