Frank Knight has a job as a sales manager earning $100,000 per year, and he is deciding whether to purchase a bakery that generates revenue of $550,000 per year. To purchase the business, Frank would have to:
• Use his $100,000 savings (assuming interest earned is 10 per cent )
• Borrow $100,000 (at an interest of 15 per cent)
• Purchase Van $45,000
• Rent $60,000
• Hire help $50,000
• Supplies $90,000
• Assume income and business tax is zero
A) What would be the business and economic profit if Frank purchases the bakery? Should Frank purchase the Bakery?
B) If Frank's salary as a sales manager was $70,000 instead of $100,000 would your answer be different?
C) If you knew that a new firm was going to open and that it would cause revenue to fall to $450,000, what advice would you offer Frank?