22,000 £8,500 £2,500 £4,200 £7,000 £2,500 Sarah has personal savings sufficient to finance 70% of the initial investment. She is currently earning an annual interest rate of 1.2% on the savings. The rest of the investment finance would be provided by a five-year bank loan at a fixed annual rate of 5.9%. Required: a) Calculate the accounting profit for the first year of operations. Assume that the fixed assets are fully depreciated on a straight-line basis over their expected useful life. b)Calculate Sarah’s economic profit for the first year. c) Comment on the significance of the economic profit for Sarah’s decision about whether to set up in business.
Sarah earns an annual salary of £76,000, working for an investment bank. She is considering resigning and setting up her own business.
Sarah estimates that the new business requires an initial investment of £96,000 for fixed assets with an expected useful life of five years.
|
Sales
Operating Expenses Rent Lease of equipment Staff salaries Supplies Utility bills Insurance Business rates Advertising Legal, audit and banking fees |
£320,000
£52,000 £13,250 £126,500 £22,000 £8,500 £2,500 £4,200 £7,000 £2,500 |
Sarah has personal savings sufficient to finance 70% of the initial investment. She is currently earning an annual interest rate of 1.2% on the savings. The rest of the investment finance would be provided by a five-year bank loan at a fixed annual rate of 5.9%.
Required:
a) Calculate the accounting profit for the first year of operations. Assume that the fixed assets are fully depreciated on a straight-line basis over their expected useful life.
b)Calculate Sarah’s economic profit for the first year.
c) Comment on the significance of the economic profit for Sarah’s decision about whether to set up in business.
Step by step
Solved in 4 steps with 4 images
