The South End bookstore has an annual profit of $170,000. The owner is considering opening a second bookstore on the north side of the campus. He can lease an existing building for 5 years with an option to continue the lease for a second 5-year period. If he opens the second bookstore, he expects the existing store will lose some business that will he gained by "The North End," the new bookstore.. It will take $500,000 of store fixtures and inventory to open The North End. He believes that the two stores will have a combined profit of $260,000 a year after all the expenses of both stores have been paid.
The owner's economic analysis is based on a 5-yearperiod. He will be able to recover this $500,000 investment at the end of 5 years by selling the store fixtures and inventory. The owner will not open The North End unless he can expect a 15% rate of return. What should he do? Show computations to justify your decision.