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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 generate 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 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?

b. Supposed 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 3 years of operation?

d. Suppose that Samantha expects to sell the pharmacy at the end of the 3 years for $50,000 more than the price she paid for it and that she requires a 15 percents return on her investment. Should she still purchase the pharmacy?

Respuesta :

jepessoa

Answer:

total revenue = 200,000

accounting costs = ($80,000 x 10%)interests + $80,000 in supplies + $40,000 hired help + $10,000 rent + $5,000 utilities = $143,000

implicit costs = $40,000 lost wages + ($20,000 x 10%) lost interests = $42,000

A) accounting profit = $200,000 - $143,000 = $57,000

economic profit = $57,000 - $42,000 = $15,000

B) for economic profit to = $0, then total revenue must decrease by $15,000

total revenue = $200,000 - $15,000 = $185,000

C) The monopoly theory of profits states that above normal profits result from monopolistic powers, i.e. since Samantha owns the only pharmacy in the neighborhood she operates like a monopoly and is able to make economic profits.

D) Samantha paid $100,000 for the pharmacy, so the selling price = $100,000 + $50,000 = $150,000

Samantha must pay back her loan, so she will receive = $150,000 - $80,000 = $70,000 (she had already paid the $8,000 in interests for the year).

Since Samantha requires a 15% gain on her investment, we must determine the NPV.

  • Initial investment = $20,0000 own savings + $80,000 loan = $100,000
  • Cash flow 1 = $15,000 economic profit + $10,000 interest expenses = $25,000
  • Cash flow 2 = $15,000 economic profit + $10,000 interest expenses = $25,000
  • Cash flow 3 = $15,000 economic profit + $10,000 interest expenses + $70,000 revenue generated by selling the pharmacy = $95,000
  • rate = 15%

NPV = -$100,000 + $103,107 = $3,107

Since the NPV ≥ $0, then Samantha should purchase the pharmacy.

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