You are considering getting a Little Nero Caesar Salad Franchise, because your boss (the owner of a Down Under Sandwich Shoppe) seems to be making it big. The Down Under Shoppe grosses an average of $380,000 sales annually. You estimate that you can gross an average of 95% of Down Under's sales. You must borrow $320,000 from the bank. The bank will charge you 12% per annum interest on this loan. You also will invest $50,000 of your savings in the business (on which you are presently earning 4% per annum interest for yourself). NOTE: neither the bank loan principal nor the $50,000 of your savings you invest is an explicit or implicit cost. However, the interest paid on the bank loan is explicit and the interest foregone on your savings is implicit. Other estimated expenses are: labor $130,000 per year; rent $12,000 a year; utilities $4,000 a year; and salad ingredients $140,000 a year. Franchise fees will cost you $1,000 a year plus 4% of gross sales. You will have to give up your present job at Down Under, which is earning you $18,000 annually plus a yearend bonus of 1% of Down Under's gross sales.
- What is the estimated explicit (accounting) cost of your proposed business? Itemize in detail.
- What is the accounting profit you project for your business?
- What is the total implicit cost you estimate for your venture? Itemize in detail.
- Do you project any economic profit? How much?
- What is the explicit annual interest you estimate the bank loan will cost you?
- From the profit viewpoint, would this be a viable business to start? Explain.