You are a proud owner of an engraving business. However, you are using an aging
ID: 3004385 • Letter: Y
Question
You are a proud owner of an engraving business. However, you are using an aging rotary engraver to engrave plaques and trophies. The machine has been reliable, but does require regular maintenance and periodic replacement of parts. You have just found out that this engraver will no longer be supported by the manufacturer. This means that service and parts will be hard to get in the future and if it breaks it could take up to three weeks to get a new one up and running. You keep this machine running almost 8 hours a day, every day. Every day that the engraver is down will cost around $975 in lost income. If you have to buy a new engraver, it would cost around $25,000. You can get a one-year loan at 12% to buy a new engraver, but you worry that this is a lot of money to spend, especially since the old engraver is still working fine. You have to make a decision. In this discussion, pose you argument on whether you should purchase a new engraver now or wait until the old engraver breaks before ordering a new engraver? To help you construct your argument answer the following steps: 1.The local bank will loan you $25,000 for 1 year at an interest rate of 12% with only one payment due at the end of the year. If you borrow the full $25,000 for the new engraver, what will the total cost of the loan be? 2.Calculate the total amount of revenue (gross profit) that will be lost if the engraver breaks and is down for 18 business days. 3.If the engraving business makes $975 per day in revenue and generates a net profit of 25%, how much profit is generated per day? 4.Given a 25% profit margin and $975 per day in revenue, how many days would it take for the new engraver to earn back the total cost of purchase, if the entire net profit were allocated to pay for the unit? 5.What other factors should you consider in order to make a good business decision?
Explanation / Answer
1. The principal is $25,000, the interest rate is 12%, and the time is 1year.I=$25,000x0.12x1I=$3,000The total cost of the engraver would be the interest charge ($3,000) added to theprinciple ($25,000). This would give a total cost of $28,000.
The total cost of taking loan along with interest is $28,000 ($25,000 + 12% of 25,000).
2.If the current engraver breaks it would take 18 days to get the new engraver andto get everyone trained on it. The engraver going down would result in a $975 aday loss. This would make the total revenue loss $17,550.
The total amount of revenue lost for 18 days if engraver breaks down is $17,550 (975 x 18).
3.The net profit is 25% of the daily revenue. The daily revenue is $975. This wouldgive a net profit of $243.75 daily
The profit generated from engraver per day is $234.75 (25% of 975).
4.Total number of days to pay the loan from entire net profit is 120 days (28,000/234.75).
5.Being an owner I will prefer taking loan. Because if loan is not taken and engraver breaks down,loss of revenue for 18 days will be $17,550(975 x 18)
6.Loss of revenue when loan is taken is $10,450 (28,000-17,550).
7.Therefore, it is better to buy new engraver. Certain factors can be considered like current positionof engraver. If the condition is such that it work properly for two to three months, in that casebuying of new engraver can be delayed. Some other factors can be availability of funds, etc
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