Case 8-1 Jeff's Self Service Station

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Case 8-1 JEFF’S SELF-SERVICE STATION a. Determine the indicated return on investment if John Deardon purchases the station. Include only financial data that will be recorded on the books. Consider 2011 & 2010 to be representative years for revenue and expenses. b. Determine the indicated return on investment if help were hired to operate the station. c. Why is there a difference between the rates of return in (a) and (b)? There is a difference because in problem (a), there was no expense of a $10,000 for help hired to operate the station. However, in problem (b), this is deducted which actually lowers the taxable income and taxes. The rate of return in (a) must be higher to compensate for the opportunity cost of the salary to the owner. Also, giving data only reflects the actual cost, and all costs need to be considered when analyzing the investment. d. Determine the cash flow for 2012 if John serves as the manager and 2012 turns out to be the same as 2011. Do not include the cost of the hired help. No inventory is on hand at the date of purchase, but an inventory of $10,000 is on hand at the end of the year. There are no receivables or liabilities. e. Indicate some other considerations that should be analyzed. Some other considerations that should be analyzed are; 1. Future tax rate 2. Can John serve as a manager and owning the business 3. Will there be a possible appreciation in the value of the property. f. Should John purchase the station? The case does not prove professional business history of John; if he was a business owner before, and/or what he did for a living. This would be good to know in order to identify if John knows anything about owning a business and how to manage a business. I believe more financial data and statements of earnings for past 5 years should have been included in order to fully

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