Abstract
We are going to analyze two entrepreneurs situations, Jane and Elizabeth. Both have decided to open a retail music store in a large shopping mall, purchase CDs from the large music distributors, and resell them to the public. Our goal is to analyze this project so that they can make strategic financial choices for their company and be profitable. Their first decision is to determine if they can profit from this venture, so they must perform a Break-even Analysis. Their monthly rent and utilities are $5,000. They will hire one part-time employee who will earn $1,000 per month. They also will have a small advertising budget of $300 per month for a website, posters, and ads in music magazines. Other miscellaneous operating expenses will be $100 per month. In addition to their own contributions, they also took out a simple loan for $40,000 at a 12% annual interest rate (1% per month). The CDs cost them an average of $12 each and they will sell them for $20 each. Another bank has offered them the $40,000 loan at a lower interest rate of 11% per year, but this loan is a discount loan. Is this a better loan for them? The music distributors that sell them their CDs offer terms of 3/10 net 40. Jane thinks that they should not take the discounts since they don't have much extra cash. Elizabeth thinks that they should take the discounts and pay with the company credit card, even though it charges them 22% interest. Who is right?
