Reference no: EM132844549

Question - The First Nation Band operates an industrial park, an area of land developed as a site for factories and other industrial businesses. One of the tenants operates a sawmill that process wood to be used in furniture. The business has operated for 10 years, however, for the last 4 years, operations have failed to produce net income after all expenses and dividends, and the single owner has fallen behind on payments and unfortunately filed for bankruptcy. The business employs 40 people from the First Nation Community.

The employees have approached the Band office through their economic development department as they wish to purchase the sawmill and operate the mill as an employee owned business. To make this happen, the economic development department of the First Nation Band would need to provide a $1 million loan that would be repayable.

The financial data of the sawmill is as follows:

1) Sales for last three years from previous to recent were; $5 million, $4.5 million and $4 million

2) Cost of goods sold for each year was 60%. All other overhead expenses were 30%.

3) The company had depreciation of $200,000 for each of the last 3 years.

4) The company purchased fixed assets of $250,000 during each of the last 3 years.

5) The previous owner typically declared a dividend of 10% of sales each year. Note, the dividend is in addition to the cost of goods sold and operating expenses.

6) Total assets of the business have an original cost of $2 million.

Other important data to consider:

1) The previous owner was absent quite often and not fully committed to the business.

2) There is real growth opportunity for the business as there are only a few number of sawmills that can process this type of wood product.

3) There is only $2 Million dollars in the economic development fund.

4) The expectation is that it would be difficult for the 40 employees to find other employment.

Required -

a) Prepare the Income Statement for the past 3 years.

b) What are some of the expenses that a sawmill would have in cost of goods sold and in operating expenses.

c) What are the benefits and risks if the Band provided the $1 million loan for the employee purchase of the mill.

d) If you were a member of the economic development committee, how would you vote and explain why.