Samantha Jones 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 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.(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?(d) Suppose that Samantha expects to see all the pharmacy at the end of three years for $50000 less that the price she paid for it and that she requires a 15 precent return on her investment. Should she still purchase the pharmacy?
(b) First, let's calculate the annual cost of interest on the loan: 10% of $80,000 is $8,000. Now, let's calculate the total annual expenses of the pharmacy: $80,000 (supplies) + $40,000 (hired help) + $10,000 (rent) + $5,000 (utilities) + $8,000 (interest) = $143,000. Since the economic profit will be zero in three years, the revenue should be equal to the total expenses. Therefore, the revenue of the pharmacy in three years would be $143,000.
(d) To determine if Samantha should purchase the pharmacy, we need to calculate her expected return on investment. First, let's calculate the net profit of the pharmacy:
Net profit = Revenue - Total expenses = $200,000 - $143,000 = $57,000 per year.
In three years, the total net profit would be $57,000 * 3 = $171,000. However, Samantha expects to sell the pharmacy at the end of the third year for $50,000 less than what she paid for it, which means she would get back $20,000 (her original savings) - $50,000 = -$30,000. Therefore, her total return after three years would be $171,000 - $30,000 = $141,000.
Now let's calculate the expected return on investment:
Expected ROI = (Total return / Initial investment) * 100 = ($141,000 / $20,000) * 100 = 705%.
Since Samantha's expected ROI of 705% is much greater than her required return of 15%, she should purchase the pharmacy.
(b) To calculate the revenue of the pharmacy in three years, we need to subtract the expenses from the projected revenue.
Projected revenue: $200,000 per year
Expenses:
Supplies: $80,000
Hired help: $40,000
Rent: $10,000
Utilities: $5,000
Total expenses: $80,000 + $40,000 + $10,000 + $5,000 = $135,000
Projected revenue after expenses in three years: $200,000 - $135,000 = $65,000
Therefore, the revenue of the pharmacy would be $65,000 in three years.
(d) To determine whether Samantha should purchase the pharmacy, we need to calculate the present value of the expected future cash flows and compare it to the cost of purchasing the pharmacy.
Expected revenue in three years: $65,000
Expected selling price after three years: Purchase price - $50,000 = $200,000 - $50,000 = $150,000
Discount rate: 15%
Present value of expected revenue in three years: $65,000 / (1 + 0.15)^3 = $65,000 / (1.15)^3 = $65,000 / 1.52 = $42,763.16
Present value of expected selling price after three years: $150,000 / (1 + 0.15)^3 = $150,000 / (1.15)^3 = $150,000 / 1.52 = $98,684.21
Total present value of expected cash flows: $42,763.16 + $98,684.21 = $141,447.37
Cost of purchasing the pharmacy: $20,000 (Savings) + $80,000 (Loan) = $100,000
Since the total present value of expected cash flows ($141,447.37) is greater than the cost of purchasing the pharmacy ($100,000), Samantha should still purchase the pharmacy.
To answer these questions, we need to calculate the revenue of the pharmacy in three years and determine if Samantha should purchase it.
Let's break down the information provided:
Initial job salary: $30,000 per year
Job offer as manager: $40,000 per year
Purchase price of the pharmacy: $20,000 (savings) + $80,000 (loan) = $100,000
Additional expenses for the purchased pharmacy: $80,000 (supplies) + $40,000 (hired help) + $10,000 (rent) + $5,000 (utilities) = $135,000
(a) To compare Samantha's options, we need to calculate the total income and expenses for each scenario:
1. Working as a pharmacist (current job):
- Total income: $30,000 per year
- Total expenses: N/A (no significant additional expenses mentioned)
2. Job offer as a manager:
- Total income: $40,000 per year
- Total expenses: N/A (no significant additional expenses mentioned)
3. Purchasing the pharmacy:
- Total income: $200,000 per year
- Total expenses: $135,000 (mentioned above)
(b) To calculate the revenue of the pharmacy in three years, we need to determine the economic profit:
Economic profit = Total Income - Total Expenses
Given that the economic profit is expected to be zero after three years due to a new nearby pharmacy opening, we can calculate the revenue in three years:
Revenue in three years = Total Expenses (at the end of three years)
+ Economic profit (which is zero)
Total Expenses at the end of three years:
= Initial expenses ($135,000) + Interest on the loan ($80,000 * 0.10 * 3 years)
Revenue in three years = $135,000 + ($80,000 * 0.10 * 3) = $135,000 + $24,000 = $159,000
Therefore, the revenue of the pharmacy in three years would be $159,000.
(d) To determine if Samantha should still purchase the pharmacy, we need to calculate her expected return on investment (ROI) and compare it to her required return.
Expected ROI = (Revenue at the end of three years - Purchase price) / Purchase price * 100%
Revenue at the end of three years: $159,000 (calculated above)
Purchase price: $100,000
Expected ROI: (159,000 - 100,000) / 100,000 * 100% = 59%
Samantha requires a 15% return on her investment, but the expected ROI is 59%. Since the expected ROI is higher than her required return, Samantha should still consider purchasing the pharmacy.
Keep in mind that this analysis does not consider other factors such as risk, market conditions, or personal circumstances, which Samantha should also consider before making a final decision.