Samantha Roberts has a job as a pharmacist earning $30,000 per year, and she is deciding whether to take another job as a manager of another pharmacy for $40,000 per year of 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 an additional expense of $80,000 for supplies, $40,000 for hired help, $10,000 for rent, and $5,000 for utilities. Assume that business and income taxes are zero and that the repayment of the principal of the loan does not start for three years.
What would be the business and economic profit if Samantha purchased the pharmacy? Should Samantha purchase the pharmacy?Suppose that Samantha expects that another pharmacy will open nearby at the end of three years and that this will drive the economic profit to zero. What would the revenue of the pharmacy be in three years?What theory of profit would account for profits being earned by the pharmacy during the first three years of operation?Suppose that Samantha expects to sell the pharmacy for $50.000 less than the price she paid for it and that she requires a 15 percent return on her investment. Should she still purchase the pharmacy?
Note: Compare the present value of 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.