Question

Three people are starting a communications service business. They expect to have net operating losses of $120,000 per year for the first two years, followed by net operating profits of $240,000 per year for the next eight years. The losses will be covered by borrowing $10,000 at the end of each of the first 24 months at a monthly interest rate of 2%. If the debt is repaid as rapidly as possible, during what year will the balance of the debt reach zero?

A) 2
B) 3
C) 4
D) never

Answer 1

The exact year when the debt will reach zero cannot be determined without additional information on the repayment schedule and interest accumulation. However, if the net profits are used to pay off the debt promptly starting in year three, the business could potentially clear the debt before the end of the ten-year period.

Step-by-step explanation:

The question involves calculating the year in which the balance of a business's debt will reach zero. The business is projected to have net operating losses of $120,000 per year for the first two years and net operating profits of $240,000 per year for the following eight years. They will cover these losses by borrowing $10,000 at the end of each of the first 24 months at a monthly interest rate of 2%. The repaid debt schedule must factor in the accumulating interest as well as the expected net operating profits used to pay off the debt.

Unfortunately, without additional information or a specific formula to calculate the repayment schedule that includes monthly interest accumulation, the precise year in which the debt will be paid off cannot be determined from the given information. However, based on the assumption of rapid repayment from the net profits starting in year three, it is theoretically possible for the debt to reach zero before the ten-year mark. This answer is based on understanding debt repayment, interest calculations, and profit reinvestment strategies similar to examples from credit card or student loan debts seen in real-world scenarios.