Jeff’s self- service station

                               

 

John Dearden and his wife, Patricia,  have  been  taking  an  annual  vacation  to  Stowe, Vermont, each summer. They like the area very much and would like to retire someday in this vicinity. While in Stowe during the summer, they notice a “for sale” sign in front of a self-service station. John is 55 and is no longer satisfied with commuting to work in New York City. He decides to inquire about the asking price of the station. He is aware that Stowe is considered a good vacation area during the entire year, especially when the ski season is in progress.

On inquiry, John determines that the asking price of the station is $70,000, which includes two pumps, a small building, and 1/8 acre of    land.

John asks to see some financial statements and is shown profit and loss statements for 2007 and 2006 that have been prepared for tax purposes by a local accountant.

 

JEFF’S  SELF-SERVICE STATION

Statement of Earnings

For the Years Ended December 31, 2007 and  2006

2007                                   2006

Revenue	$185,060		$175,180
Expenses: Cost of goods sold	160,180		153,280
Depreciation (a)	1,000		1,000
Real estate and property taxes	1,100		1,050
Repairs and maintenance	1,470		1,200
Other expenses	680		725
Total expenses	164,430		157,255
Profit	$  20,630		$  17,925

(a) Building and equipment cost                                                                              $30,000 Original estimated life                                                                                              30 years

Depreciation per year                                                                                                 $1,000

 

John is also given an appraiser’s report on the property. The land is appraised at $50,000, and the equipment and building are valued at $20,000. The equipment and building are esti- mated to have a useful life of 10   years.

The station has been operated by Jeff Szabo without additional help. He estimates that if help were hired to operate the station, it would cost $10,000 per year. John anticipates that he will be able to operate the station without additional help. John intends to incorporate. The anticipated tax rate is   50%.

 

Required           a.   Determine the indicated return on investment if John Dearden purchases the sta- tion. Include only financial data that will be recorded on the books. Consider 007 and 2006 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)? Discuss.

d.     Determine the cash flow for 2008 if John serves as the manager and 2008  turns out to be the same as 2007. Do not include the cost of the hired help. No inven- tory 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.

f.       Should John purchase the station?