Final answer:
To determine if a store should be opened, one must calculate the Net Present Value (NPV) using cash flows, depreciation, and the opportunity cost of capital. A positive NPV suggests that the investment is expected to be profitable. Total costs should be thoroughly reviewed to make business decisions on whether to continue operations or to shut down.
Step-by-step explanation:
When assessing whether a store should be opened or not, an important financial metric to consider is the Net Present Value (NPV). The NPV accounts for the initial investment costs, operating cash flow, and other financial elements like depreciation, opportunity cost of capital, and tax effects. To calculate the NPV, the cash flows are discounted back to their present value using the opportunity cost of capital and then subtracting the initial investment costs from the total of these present values.
The earlier provided operating cash flow of $272,333.33 suggests that after accounting for variable costs, fixed costs, and taxes, the store earns a positive cash flow. This, along with the initial investment, the opportunity cost of capital, and the depreciation, will be used to calculate the NPV. If the NPV is positive, the investment is considered good because it is expected to generate more cash than the cost of the capital invested.
In scenarios where total costs are the sum of fixed plus variable costs, assessing the profitability of a business, such as a barber shop or a center, involves analyzing whether revenues exceed these costs. If revenues are greater than variable costs but less than total costs, the business may continue operating to cover variable costs, assuming fixed costs as sunk costs, but if revenues do not cover variable costs, it is typically advised to shut down.