1A Len and Joan intend to invest $200,000 in a business to launchtheir CompuTech

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1A

Len and Joan intend to invest $200,000 in a business to launchtheir CompuTech Sales and Services retail store. TheirFinancial projections show that during the first year of operationsCompuTech would generate $25,000 in profit after taxes withsubstantial increments during the following years. To financetheir business, Len and Joan would obtain a $100,000 loan from thebank at 8%. (after taxes) and invest part of their $100,000 savingsinto their business. The Edwardses are currently earning 8%(after taxes) on their savings.

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Explanation / Answer

Investment Amount = $200,000

Profit after Taxes      = $25,000

Return on Assets (ROA) means what earnings were generated fromInvested Capital (Assets).

Return on Assets (ROA) = Net Income (PAT) /Total Assets(Invested Capital)  

                             ROA   = $25,000 /$200,000

Loan Amount = $100,000

Interest Rate = 8%

Cost of finance = $100,000 * 8%

                        = $8,000

The Loan amount $100,000 is invested and earn 8% interest onthat amount (after taxes).

Interest earnings = $100,000 * 8%

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