Sam 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, Sam would have to use her $20,000 savings and borrow another $80,000 at an interest rate of 10% per year. The pharmacy that Sam 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 for before three years.
What would be the business and economic profit if Sam purchased the pharmacy? Should Sam purchase the pharmacy?
Suppose Sam expects that another pharmacy will open nearby at the end of the three years and that this will drive economic profit of the pharmacy to zero. What would the revenue of the pharmacy be in three years?
What theory of profit would account for profits being earned by the pharmacy during the first three years of operation?
Suppose that Sam expects to sell the pharmacy at the end of three years for $50,000 less than the price she paid for it and that she requires 15% return on her investment, should she still purchase the pharmacy?
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