Question

You have determined in your mind that you would like to have a business of your own, although your father runs a family restaurant in your local city. You have therefore, decided to have a medium size snack and cocktails bar which will accommodate the cruise ship passengers who visit your city. You plan to keep the business for five years after which you will sell it off to your brother John for $2,000,000 and go off to do your Master's Degree in the UK. Though you will be occupying the establishment from your grandmother for free, you have decided that you need to make some improvements to the property which will cost you $1,500,000. Additionally, you will spend $275,000 in bar stools, tables and decorations. If this space had been leased out, it would have fetched a lease rental of $75,000 per year. You will depreciate the assets over 7 years using MACRS. You have determined that you would need an average cash balance of $15,000 and inventory of $20,000 while Accounts payable should average $10,000. You plan to borrow the money from a local bank and pay interest at a rate of 15 percent. To increase your chances of success at the business you plan to have your cousin Johnathan to conduct a market survey which will cost you $100,000. Your new venture will decrease the revenue your family business will earn by $15,000 per year and you have agreed to allow your father to take this amount from your allowance as a shareholder of the family restaurant.

Revenues are projected to be $500,000 the first year and is expected to increase by 29% the second year, 15% the third year and to continue to increase at 10% thereafter. Fixed annual operating costs are expected to be salaries of $110,000, Utilities $75,000, Food and Liquor License is 15% of gross revenues and taxes are 40% of net revenues

Answer 1

To determine if Eryn's legal practice would be profitable, we need to consider both explicit and implicit costs. The explicit costs include office rental and the law clerk's salary, while the implicit cost is Eryn's foregone annual salary. If the total costs exceed the expected revenue, the practice would be unprofitable.

To determine whether Eryn's legal practice would be profitable, we need to consider both explicit and implicit costs. The explicit costs include the office rental of $50,000 per year and the law clerk's salary of $35,000 per year, totaling $85,000. However, we also need to consider the implicit cost of Eryn's current annual salary of $125,000, which she would forego if she opens her own firm. Therefore, the total costs would be $210,000 ($85,000 explicit costs + $125,000 implicit cost).

If Eryn's legal practice is expected to earn $200,000 per year once she establishes herself, it would not be profitable as the total costs exceed the expected revenue. Eryn would be incurring a loss of $10,000 ($200,000 revenue - $210,000 total costs).