Reference no: EM133090454

Question - Retiring from the army, John Rambo is considering opening a small boxing club, which he would call The Rocky Boxing Club. For this project, he would need to purchase a warehouse, in which he will build a boxing ring, costing $250 000 for the real estate and another $35,000 for equipment. His own salary will be $25,000 per year. John's best friend, whom is a CPA, believes that the annual cash inflow from the business will amount to $85,000. He also expects annual expenses of $42,000 of various small supplies, insurance, and other recurring fees. The corporate tax rate is 20%.

John wants to operate the boxing business for only five years, after which he will retire in the family farm. He estimates that the equipment will be worthless for resale, but real estate tends to appreciate, and he expects to be able to sell it for 115% of its cost. The working capital will be fully released for other purposes at the end of the fifth year. John uses a 12% discount rate.

Required - Would you advise John to open his boxing gym, or retire in his family farm immediately? Ignore income taxes?