Ram Singh, 45 years of age, has received an inheritance of Rs 300,000 from his father.

Ram Singh, 45 years of age, has received an inheritance of Rs 300,000 from his father. He is currently working in materials management in a company, and his salary is Rs 36,000 per year, which he does not expect to change if he remains in his present employment till his retirement age of 58. He is considering two alternative investments of his inheritance. The first alternative is to continue in his present employment and to deposit Rs 300,000 in 13-year fixed deposit yielding 15 per cent compound interest. The second would be to purchase and operate a general store. He knows that to own a store, he will have to spend Rs 240,000 including Rs 100,000 for merchandise and the balance for building and fixtures. If he purchases the store, an additional Rs 60,000 will have to be invested for working capital needs. The expected annual receipts of this store are Rs 390,000. Annual out-of-pocket costs are estimated at Rs 300,000. As Ram Singh would manage his own store, he would have to leave his present employment. At the end of 13 years, when he wishes to retire in any event, he estimates the store would be sold for Rs 50,000. The applicable personal income tax rate is 30 per cent.

Which course of action would be more profitable for Ram Singh? Why?

 

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