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?

Question

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?

Bot · Answer

(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.