Determine the indicated return on investment

Assignment Help Financial Management

Reference no: EM131318424

JEFF'S SELF-SERVICE STATION
John Dearden and his wife, Patricia, have been taking a vacation to Stowe, Vermont, each summer. They like the area very much and would like to retire someday in this vicinity. While in Stowe during the summer, they notice a "for sale" sign in front of a self-service station. John is 55 and is no longer satisfied with commuting to work in New York City. He decides to inquire about the asking price of the station. He is aware that Stowe is considered a good vacation area during the entire year, especially when the ski season is in progress. On inquiry, John determines that the asking price of the station is $70,000, which includes two pumps, a small building, and 1/8 acre of land.

John asks to see some financial statements and is shown profit and loss statements for 2011 and 2010 that have been prepared for tax purposes by a local accountant.

198_Tab 04.jpg

John is also given an appraiser's report on the property. The land is appraised at $50,000, and the equipment and building are valued at $20,000. The equipment and building are estimated to have a useful life of 10 years.

The station has been operated by Jeff Anderson without additional help. He estimates that if help were hired to operate the station, it would cost $10,000 per year. John anticipates that he will be able to operate the station without additional help. John intends to incorporate. The anticipated tax rate is 50%.

Required
a. Determine the indicated return on investment if John Dearden purchases the station. Include only financial data that will be recorded on the books. Consider 2011 and 2010 to be representative years for revenue and expenses.

b. Determine the indicated return on investment if help were hired to operate the station.

c. Why is there a difference between the rates of return in (a) and (b)? Discuss.

d. Determine the cash flow for 2012 if John serves as the manager and 2012 turns out to be the same as 2011. Do not include the cost of the hired help. No inventory is on hand at the date of purchase, but an inventory of $10,000 is on hand at the end of the year. There are no receivables or liabilities.

e. Indicate some other considerations that should be analyzed.

f. Should John purchase the station?

Reference no: EM131318424

Questions Cloud

Determine an appropriate digital marketing plan : This part of your Marketplace Live simulation assignment is individual. You will present the content to your team members and determine an appropriate digital marketing plan to include in your Marketing Plan assignment.

What will be the counselor role with this client : What will be the goals of counseling and what intervention strategies are used to accomplish those goals? Is your theory designed for short- or long-term counseling? What will be the counselor's role with this client

Analyze the issues of using military force against terrorism : Analyze the issues of using military force against terrorism. Does one method work better than another? Explain your answer.

Identify a plc company that uses strategic management : Identify a PLC company that uses strategic management - this company may be prosperous, booming, in decline, or in economic difficulties.

Determine the indicated return on investment : Determine the indicated return on investment if John Dearden purchases the station. Include only financial data that will be recorded on the books.

Numbers to bond investors : Suppose that a bond has a yield to call (YTC) equal to 6.5 percent and a yield to maturity (YTM) equal to 6.3 percent. Explain the meanings of these numbers to bond investors.

Do preemptive actions work better than a defensive posture : The concept of "If we fight terrorists somewhere else, they will not come here" has been bantered about for years. Do preemptive actions work better than a defensive posture (attacking terrorists on home soil)? Explain your answer.

Write in the value with two decimal points : If investors require a return of 11.8% from this stock, what is the value of the ABC stock? Write in the value with two decimal points but no dollar sign or comma.

Define estimate of this company''s price per share of stock : Why might you prefer to use a measure of cash flow generating ability such as earnings instead of sales in relative valuation?

User Account

All Pages