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!!!!!
Hello, How I can find the answer of this question?
(a) To calculate the business profit of purchasing the pharmacy, we need to subtract the expenses from the revenue. The expenses include supplies ($80,000), hired help ($40,000), rent ($10,000), and utilities ($5,000). Adding all these expenses together, we get a total expense of $135,000.
The revenue of the pharmacy is given as $200,000. Therefore, the business profit can be calculated as:
Business Profit = Revenue - Expenses
Business Profit = $200,000 - $135,000
Business Profit = $65,000
Next, we need to calculate the economic profit. Economic profit considers both explicit costs (such as expenses) and implicit costs (such as the opportunity cost of using her savings and borrowing money). In this case, the implicit cost would be the interest paid on the loan of $80,000 at an interest rate of 10 percent per year.
The interest paid on the loan after three years can be calculated as:
Interest Paid = Loan Amount * Interest Rate * Years
Interest Paid = $80,000 * 0.10 * 3
Interest Paid = $24,000
Now, we can calculate the economic profit by subtracting both explicit and implicit costs from the revenue:
Economic Profit = Revenue - Explicit Costs - Implicit Costs
Economic Profit = $200,000 - $135,000 - $24,000
Economic Profit = $41,000
Therefore, the business profit is $65,000, and the economic profit is $41,000. Based on these calculations, Samantha should purchase the pharmacy if she is specifically interested in maximizing her business profit. However, if she considers the economic profit, she needs to weigh the potential benefits against the risk and interest payments associated with borrowing money.
(b) Suppose Samantha expects the economic profit of the pharmacy to be zero after three years due to the opening of another nearby pharmacy. To calculate the revenue of the pharmacy in three years, we need to account for the expenses and the expected economic profit.
Assuming the expenses remain the same, the revenue can be calculated as:
Revenue = Expenses + Economic Profit
Revenue = $135,000 + $0
Revenue = $135,000
Therefore, the revenue of the pharmacy after three years would be $135,000.
(c) The theory of profit that accounts for profits being earned by the pharmacy during the first three years of operation is the theory of entrepreneurship. This theory suggests that entrepreneurs, like Samantha, invest their time, money, and effort into creating and running a successful business venture. By taking on risks, making strategic decisions, and managing resources effectively, entrepreneurs can generate profits in the early stages of a business.
(d) To determine if Samantha should still purchase the pharmacy considering her expectation of selling it for $50,000 more than the purchase price in three years and her required return on investment of 15 percent, we need to calculate the total return.
The total return is the sum of the profit earned during the three years of operation and the expected profit from selling the pharmacy. The profit from selling the pharmacy would be $50,000 more than the purchase price. Let's assume the purchase price is P.
Total Return = Profit from Operation + Profit from Sale
Profit from Operation = Economic Profit * Number of Years
Profit from Operation = $41,000 * 3
Profit from Operation = $123,000
Profit from Sale = Selling Price - Purchase Price
Profit from Sale = (P + $50,000) - P
Profit from Sale = $50,000
Total Return = $123,000 + $50,000
Total Return = $173,000
Now, we can calculate Samantha's return on investment by dividing the total return by her initial investment (savings of $20,000 and a loan of $80,000) and multiplying by 100 to get the percentage:
Return on Investment = (Total Return / Initial Investment) * 100
Initial Investment = $20,000 + $80,000
Initial Investment = $100,000
Return on Investment = ($173,000 / $100,000) * 100
Return on Investment = 173%
Since the return on investment (173%) is higher than Samantha's required return of 15 percent, she should still consider purchasing the pharmacy.