Samantha Roberts has a job as a pharmacist earning $ 30,000 per year, and she is

Question

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 generates a 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 an interest rate of 10 percent per year. The pharmacy that Samantha is contemplating purchasing has additional expenses of $ 80,000for 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. ( d) Suppose that Samantha expects to sell the pharmacy at the end of three years for $ 50,000 LESS than the price she paid for it and that she requires a 15 percent return on her investment. Compare the present value of the economic profit in each of the next three years and the loss of $ 50,000 in the third year using 15% as the discount rate. Should she still purchase the pharmacy?

Explanation / Answer

Solution:

If Samantha sells the pharmacy after three years then is expected to receive:
= $50,000 + $20000X0.15+ $80,000X(Interest to be received - interest to be paid)
= $50,000 + $20,000X0.15+ $80,000X(0.15-0.10) = $57000

On contrary if had worked as manager, Samantha could have earned $120000 (=$40,000*3) after 3 years.

Thus, Samantha should work as manager instead of purchasing the pharmacy

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