A company is projecting a cost of goods of 52% of the selling price of its products. It has $280,000 in fixed overhead for administrative expenses, rent and salaries. In addition, it spends 22% of every sales dollar on marketing.
Question #1: What is the company’s break-even point? In order to start the business the owner has found an investor who will put up $500,000. The owner wants to pay back the investor out of profits, using 30% of the pre-tax profits to pay the investor, and he has guaranteed the investor he will get back $750,000
Question #2: How long will it take to pay the investor $750,000, if sales in year one are $2 million, and sales increase 13% each year. (Assume fixed expenses will increase each year at the rate of infllation or about 4%). Show your calculations in a spreadsheet Another investor has proposed putting up the $500,000 but this investor wants the money to be be paid back over ten years at $50,000 per year in principle plus interest on the outstanding loan balance. Payments would be made once per year, at the end of the year.
Question #3: How much interest will the investor who earn on his loan to the company? Show your calculations. in a spreadsheet
Question #4: Which of the two alternatives is riskier for the company? What are those risks? Question #5: Which of the two alternatives is riskier for the investor? What are those risks? For the above answers there is no need to take into account or to use Net Present Value concepts. BONUS POINTS: Would your answer be different if you did take into account Net Present Value in determining which alternative is better? Show calculations.