Question

9. Sally owns a pecan firm that sells the processed pecan. Sally acquired a new loan of $50,000 in 2016 and invested in her business. Prior to the investment, Sally's net pecan sales was $200,000 and her net income was $40,000 in 2015. After the investment in 2016, the net sales was $180,000, and after deducting all expenses including the interest for the new loan the net income was $50,000. Ms. Pattanaik a. Compare both years' (2015 and 2016) performance using the profit margin. b. What can you say of Sally taking $50,000 loan for her business? Has she wisely invested the money? c. If her business continues to perform like this, keeping all other factors same (net sales, interest rate, expenses etc.), how many years she may take to pay back her loan of $50,000?

Answer 1

Solution a. Particulars Net Income (A) Net sales (B) 2015 40000 200000 2016 50000 180000 Profit margin % (A/B x 100) 20.00% | 27.78% Comparing 2015 with 2016, we can see that the profit margin has shown a increase of 7.78%. Solution b. As we can see that profit margin of Sally has increased, this profit margin is after allowing interest expense whixh means Sally has invested the loan taken wisely. Solution c. Payback Period =- Initial Loan Net Annual Cash inflow $50000 $50000 = 1 year It will take 1 year to payback the loan at the same rate.

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