Reference no: EM133240201

Case: After spending 10 years as an assistant manager for a large restaurant chain, John Smith had decided to become his own boss. The owner of a local sandwich store wants to sell the store to John for $65,000 to be paid in installments of $13,000 in each of the next 5 years. According to the current owner, the store brings in revenue of about $110,000 per year and incurs operating costs of about 63% of sales. Thus, once the store is paid for, John should make about $35,000 - $40,000 per year before taxes. Realizing that some uncertainty is involved in the decision, John wants to simulate what level of net income he can expect to earn during the next 5 years as he operates and pays for the store. In particular, he wants to see what could happen if sales are allowed to vary uniformly between $90,000 and $120,000, and if operating costs are allowed to vary uniformly between 60% and 65% of sales. Assume that John's payments for the store are not tax deductible and that he is in the 28% tax bracket.

Given the money that he has in savings, John thinks he can get buy for the next 5 years if he can make at least a net income of $12,000 each year.

What is the probability that John will make at least $12,000 of net income in each of the next 5 years?

Set up this application in Crystal Ball using 5000 runs.

What is the probability that John will make at least $60,000 of net income total over the 5 years?