Samantha Roberts has a job as a pharmacist earning $30,000 per year, and she is deciding whether to take another job as the manager of another pharmacy for $40,000 per year or to purchase a pharmacy that generates a revenue of $200,000 per year. To purchase the pharmacy, Samantha would have to use her $20,000 savings and borrow another $80,000 at an interest rate of 10 percent per year. The pharmacy that Samantha is contemplating purchasing has additional expenses of $80,000
for supplies, $40,000 for hired help, $10,000 for rent, and $5,000 for utilities. Assume that income and business taxes are zero and that the repayment of the principal of the loan does not start before three years.
(a) What would be the business and economic profit if Samantha purchased the pharmacy? Should Samantha purchase the pharmacy?
(b) Suppose that Samantha expects that another pharmacy will open nearby at the end of three years and that this will drive the economic profit of the pharmacy to zero. What would the revenue of the pharmacy be in three years?
(c) What theory of profit would account for profits being earned by the pharmacy during the first three years of operation?
(d) Suppose that Samantha expects to sell the pharmacy at the end of three years for $50,000 more than the price she paid for it and that she requires a 15 percent return on her investment. Should she still purchase the pharmacy?
Help!!!!!
To answer these questions, we need to calculate the business and economic profit, determine the revenue after three years, discuss the theory of profit, and analyze the potential return on investment if Samantha sells the pharmacy.
(a) To calculate the business and economic profit, we need to subtract all the expenses from the revenue. The expenses include supplies ($80,000), hired help ($40,000), rent ($10,000), utilities ($5,000), and the interest payment on the loan ($80,000 * 10% = $8,000).
Total expenses = $80,000 + $40,000 + $10,000 + $5,000 + $8,000 = $143,000
To calculate the business profit, we subtract the expenses from the revenue:
Business profit = Revenue - Total expenses = $200,000 - $143,000 = $57,000 per year
The economic profit takes into account the opportunity cost of Samantha's decision. Currently, she is earning $30,000 per year as a pharmacist. So, the economic profit is the business profit minus her current salary:
Economic profit = Business profit - Current salary = $57,000 - $30,000 = $27,000 per year
Based on the calculations, Samantha would have a business profit of $57,000 per year if she purchases the pharmacy. However, when considering the opportunity cost of her current salary, the economic profit would be $27,000 per year. Whether Samantha should purchase the pharmacy or not depends on her personal financial goals, risk tolerance, and other factors beyond the scope of this analysis.
(b) If Samantha expects the economic profit of the pharmacy to be zero after three years due to competition from a nearby pharmacy, we can calculate the revenue in three years as follows:
Revenue after three years = Annual revenue * Number of years = $200,000 * 3 = $600,000
(c) The theory of profit that accounts for profits being earned by the pharmacy during the first three years is the theory of entrepreneurship. In this case, Samantha's investment and managerial skills contribute to the profitability of the pharmacy. She is taking the risk of investing her savings and borrowing money to start the business, and her efforts as a manager are generating the profit.
(d) If Samantha expects to sell the pharmacy at the end of three years for $50,000 more than the purchase price and she requires a 15 percent return on her investment, we can calculate the required return. The required return is the minimum profit Samantha would need to make for the investment to be worthwhile:
Required return = Investment * Required return rate = ($20,000 + $80,000) * 15% = $15,000
If the business profit after three years exceeds the required return, Samantha should still consider purchasing the pharmacy. However, the decision should also take into account other factors such as the potential risks and uncertainties in the market.
Note: These calculations are based on the information provided, and it is important to consider other factors and consult with professionals before making any financial decisions.