A young mechanical engineer is considering establishing his own small company. An investment of ₱400,000 will be required, which will be recovered in 15 years. It is estimated that sales will be...

A young mechanical engineer is considering establishing his own small company. An investment of ₱400,000 will be required, which will be recovered in 15 years. It is estimated that sales will be ₱800,000 per year and that operating expenses will be as follows:

Materials ₱360,000 per year
Labor ₱280,000 per year
Overhead ₱40,000 + 10% of sales per year
Selling Expense ₱60,000 per year

The man will give up his regular job paying ₱216,000 per year an devote full time to the operation of the business; this will result in decreasing labor cost by ₱40,000 per year, material cost by ₱28,000 per year and overhead cost by ₱32,000 per year. If the man expects to earn at least 20% of his capital, should he invest?

Answer: The man should not invest.