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Question by Julie: You and 99 other partners are offered the chance to buy a gas station and Treasury bills is yielding 7.5%?
You and 99 other partners are offered the chance to buy a gas station. Each partner would put up $ 10,000. The revenues from the operation of the station have been steady at $ 420,000 per year for several years and are projected to remain steady into the future. The cost (not including opportunity cost) of operating the station (including maintenance and repair, depreciation, salaries, and so on) has also been steady at $ 360,000 per year. Currently, 5-year Treasury bills are yielding 7.5 percent interest. Would you go in on the deal? Explain.


Best answer:

Answer by SDD
Depends on how much you expect the value of the the business to appreciate/depreciate and how risk averse your are. Essentially you have almost $ 1MM invested in teh business. You're getting $ 60M annual "profit" or 6%. This is less than T-Bills -- which are considered riskless. You would have to believe that you could sell the business for more than $ 1MM in the future just to get to that 5.75% riskless return.

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