Question

Please its my humble request to answer all parts including bonus part please please. Do not waste my question by giving wrong answers.

A company has a cost of goods of 60% of the selling price of its products. It has $250,000 in fixed overhead for administrative expenses, rent and salaries. In addition, it spends 18% of every sales dollar on marketing.

Question #1: What is the company’s break-even point?

In order to start the business the owner got an investor to 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 back the investor, if sales in year one are $2 million, and sales increase 14% each year. (Assume fixed expenses will increase each year at the rate of inflation or about 3%)

Question #3: Based purely on the financial return, and not factoring risk (think about this--what creates risk?), would the investor have been better off loaning the company $500,000 at 10% interest, to be paid back over ten years at $50,000 per year in principle plus interest, or agreeing to be paid out of profits each year at the rate of 30% of profits? Are there any other factors that should be considered in making a decision.

For the above answers there is no need to take into account or to use Net Present Value concepts.

BONUS PART: Would your answer be different if you did take into account Net Present Value in determining which alternative is better? Show calculations.

You may answer the question by providing a mathematical formulas and solving the formulas, or you may answer the question by building a simple spreadsheet.

Answer 1

Sotections I Company's Break even pointslae for first year if sales is $2 million e then, cost of goods sold 60% of $2 million 12 $1.2 million du So, cost of goods sold 2 $12,00,000 - fined overhead $ 2,50,000 Marketing enpense 2 $ 3,60,000 $ 18,10,000 to So, company's Break event point is $ 18,10,000 Ics Scanned with Can Scanner

solution 2:-

og Bo Book3 - Excel nitin arora File Home Insert Page Layout Formulas Data Review View Help Tell me what you want to do H15 : X V B year 1 for C year2 А K D year 3 L E year 4 F year 5 G year 6 I H year 7 H yearő 1 year 5 3 Sales 2000000 2280000 2599200 2963088 3377920 3850829 4389945 sales are increasing @14% 4 5 cost of goods sold 6 fixed expenses 7 marketing expenses 8 Profits 9 30% of pre-tax profits 1200000 1368000 1559520 1777853 2026752 2310497 2633967 250000 257500 265225 273182 281377 289818.5 298513.1 360000 410400 467856 533356 608026 693149.2 790190.1 190000 244100 306599 378698 461765 557364 667275 57000 73230/ 919801 113609! 138530167209] 200182 cost of goods sold are @60% of sales fixed expenses are increasing @3% marketing expenses are @18% of sales 841710 is the total payback after 7 years 10 11 12 13 14

1. So, it will take 6 years for 6 years for . will take $6,41,558 to come back out of 30% of pre-fax profits $. . in 7th year, payback of $2,00,182 will come . so, it will take 6.5 months in year 7th to pay back remaining .. amount ( 7,50,000 - 641538 = 108442) out of total year's 'lay back pay back the investor ... so, it will take 6years 6:5 months to : 1 1,08,442 x 12 months 200182 Scanned with CamScanner

solution 3:-

Book3 - Excel nitin arora F - O X ASS= File Home Insert Page Layout Formulas Data Review View Help Tell me what you want to do Share L17 - X V for C D E F G H I J K L M N O P A A B 1 IF TAKEN FROM INVESTOR year 1 year2 year 3 year 4 year 5 year 6 year 7 year 8 year 9 year 10 4 Sales 2000000 2280000 2599200 2963088 3377920 3850829 4389945 5004538 57051736503897 6 cost of goods sold 7 fixed expenses 8 marketing expenses 9 Profits 10 30% of pre-tax profits 11 remaining profit 12 1200000 1368000 1559520 17778532026752 250000 257500 265225 273182 281377 360000 410400 467856 533356 608026 190000 244100 306599378698 461765 57000 73230 91980 113609 138530 133000 170870214619 265088 323236 2310497 289819 693149 557364 167209 390155 2633967 298513 790190 667275 200182 467092 3002723 307468 900817 793530 3423104 316693 1026931 938446 3902338 326193 1170701 1104664 793530 9 38446 1104664 14 15 IF LOAN IS TAKEN 16 17 Profits 18 principal amount 19 interest 20 remaining profit 190000 50000 5000 135000 244100 50000 5000 189100 306599378698 50000 50000 5000 5000 251599 323698 461765 50000 5000 406765 557364 50000 667275 50000 793530 50000 5000 738530 938446 50000 5000 883446 1104664 50000 5000 1049664 502364 612275 24 25 26 Sheet1 + Ready B E -- 100% Type here to search O E Ô 9 e + 19:42 10-03-2020 x Q A - ENG 4

Taking loan seems to be a profitable option as compared to taking from investors as profits seems to come more in every year in case if loan is taken apart from a little less in case of year 8, 9 and 10.

if profits are coming more in every year then business can grow more as compared to another option i.e. taking from investors

solution 3 (second part):-

Book4 - Excel nitin arora F - O X ASS= File Home Insert Page Layout Formulas Data Review View Help Tell me what you want to do Share N19 F G H I J | 0 | F A B C D E 1 IF TAKEN FROM INVESTOR 2 discount rate -10% initial investment inflows present value 4 year -500000 5 year 133000 120909 6 year 170870 141215 7 year 214619 161247 8 year 265088 181059 9 year 323236 200704 10 year 390155 220232 11 year 467092 239692 12 year 793530 370188 13 year 938446 397993 14 year 1104664 425896 GODOVIAWNO K L M N ] | P IF LOAN IS TAKEN discount rate = 10% initial investment inflows present values year -500000 year 135000 122727 year 189100 156281 year 251599 189030 year 323698 221090 year 406765 252569 year 502364 283571 year 612275 314194 year 738530 344530 year 883446 374667 year 1049664 404691 EO DOWN 16 17 Net present value = NPV= present values of inflows - initial investment 1959134 Net present value = NPV= present values of inflows - initial investment 2163350 Sheet1 Ready B B E Type here to search O : Ô 9 e - F + 100% 20:08 ENG 10-03-20205 x A -

net present value is greater in case loan is taken. so the answer would not change in case net present value is taken.

here present value formula is = 1/(1+discount rate)^number of years