Reference no: EM131472332

Susan Jones has a job as a pharmacist earning $30,000 per year, and she is deciding whether to take another job as the manager of another pharmacy for $50,000 per year or to purchase a pharmacy that generates revenue of $240,000 per year. To purchase the pharmacy, Susan would have to use her $20,000 savings and borrow another $80,000 at an interest rate of 10 percent per year. The pharmacy that Susan is contemplating purchasing has additional expenses of $100,000 for prescription non-prescription drugs and lines of women's and men's personal hygiene products and cosmetics, $45,000 for one full time person and part time person, $8,000 for rent and $2000 for electricity and $1500 for natural gas and $1500 for telecommunications. Depreciation and amortization expenses are $3000. Assume that income and business taxes are 35% and the repayment of the principal of the loan does not start before three years. Also assume that revenue is expected to grow at 4% per year and expenses at 2% per year over the three years. Suppose that Susan expects to sell the pharmacy at the end of three years for $50,000 more than the price she paid for it and that she requires a 12 percent return on his investment. The current rate for 3-year U.S. Treasury bill is 2.5%. Should she still purchase the pharmacy?

1. Build a pro forma (forecasted) Economic Value Added statement for 2014, 2015, and 2016 from an economic approach and determine the expected EVA. 
2. Suppose that Susan expects to sell the pharmacy at the end of three years for $50,000 more than the price she paid for it and that she requires a 15 percent return on his investment.  Determine the net present value of the stream of profits, i.e., discounted profits in year 1, year 2, year 3 less the cost of the deal.
3. Should Susan purchase the pharmacy and sell it at the end of the third year?