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To_be_an_Entrepreneur_or_to_be_and_employee_043007 - Also...

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To be an Entrepreneur or to be an Employee - The Case of Steven Jones 1 - Steven Jones has a job as a pharmacist earning $30,000 per year, and he 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 revenue of $300,000 per year. To purchase the pharmacy, Steven would have to use his $20,000 savings and borrow another $80,000 at an interest rate of 10 percent per year. The pharmacy that Steven is contemplating purchasing has additional expenses of $80,000 for supplies, $40,000 for hired help, $10,000 for rent and $5000 for utilities. Assume that there is no depreciation and amortization expenses. Assume that income and business taxes are 40% and the repayment of the principal of the loan does not start before three years. Also assume that there is no inflation and there is no growth in revenues or expenses during the three years.
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Unformatted text preview: Also suppose that Steven expects to sell the pharmacy at the end of three years for $70,000 more than the price he paid for it and that he requires a 15 percent return on his investment. Should he still purchase the pharmacy? Analytical Steps: 1) Build a pro forma (forecasted) income statement for the years 2008, 2009, 2010. What would be the net profit if Steven purchases the pharmacy? 2) Now determine any initial investment cash flows and termination cash flows and use along with the operating cash flows in question 1, to determine the net present value of the stream of profits. Should Steven purchase the pharmacy or take the job as manager of the other pharmacy? Why? 1 Based on Integrating Problem 12, p. 31, Dominick Salvatore, Managerial Economics in a Global Economy, Fourth Edition , Southwestern, Thompson Learning, 2001....
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