Susan Jones 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 $50,000 per year or to purchase a pharmacy that generates revenue of $240,000 per year. To purchase the pharmacy, Susan 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 Susan is contemplating purchasing has additional expenses of $100,000 for prescription non-prescription drugs and lines of women's and men's personal hygiene products and cosmetics, $45,000 for one full time person and part time person, $8,000 for rent and $2000 for electricity and $1500 for natural gas and $1500 for telecommunications. Depreciation and amortization expenses are $3000. Assume that income and business taxes are 35% and the repayment of the principal of the loan does not start before three years. Also assume that revenue is expected to grow at 4% per year and expenses at 2% per year over the three years. Suppose that Susan expects to sell the pharmacy at the end of three years for $50,000 more than the price she paid for it and that she requires a 12 percent return on his investment. The current rate for 3-year U.S. Treasury bill is 2.5%. Should she still purchase the pharmacy?
- Build a pro forma (forecasted) Economic Value Added statement for 2014, 2015, and 2016 from an economic approach and determine the expected EVA.
- Suppose that Susan expects to sell the pharmacy at the end of three years for $50,000 more than the price she paid for it and that she requires a 15 percent return on his investment. Determine the net present value of the stream of profits, i.e., discounted profits in year 1, year 2, year 3 less the cost of the deal.
- Should Susan purchase the pharmacy and sell it at the end of the third year?