New Engraver Cost: $25,000, One Year Loan Cost, 12% Interest
New Engraver Cost 25000one Year Loan Cost 12 Interestrevenue Per
The assignment involves evaluating the financial aspects of acquiring and operating a new engraver with a specific set of parameters. The focus is on calculating the total cost of a loan, potential revenue loss due to downtime, daily profit, and the payback period for the engraver based on profit margins and operational days.
The key details include the purchase cost of the engraver, the loan terms, revenue per day, profit margin, potential days of downtime, and operational days per year. These data points are used to perform various financial calculations: determining total loan cost, lost revenue during downtime, daily profit, revenue and profit with full operational days, and the break-even point for the investment.
Paper For Above instruction
The financial management of business equipment investments is crucial for ensuring profitability and operational efficiency. In this context, analyzing the economics of acquiring a new engraver involves understanding the loan costs, potential revenue loss, daily profitability, and return on investment. This paper carefully examines these aspects based on given parameters to provide comprehensive insights for decision-making.
1. Total Loan Cost
The initial step is calculating the total repayment amount for the loan used to purchase the engraver. The purchase price is $25,000, and the interest rate is 12% annually, with a single repayment due at the end of the year. Calculating simple interest, the total interest payable over the year is obtained by multiplying the principal by the interest rate:
Total Interest = Principal × Rate = $25,000 × 0.12 = $3,000
Consequently, the total repayment amount at year's end will be:
Total Loan Cost = Principal + Interest = $25,000 + $3,000 = $28,000
This figure represents the total cost of financing the engraver through the loan.
2. Revenue Lost During Downtime
The potential revenue loss due to the engraver being out of commission for 18 days is an essential factor for evaluating risk. Given the daily revenue of $975, the total revenue loss can be calculated as:
Revenue Loss = Daily Revenue × Downtime Days = $975 × 18 = $17,550
This amount indicates the forgone earnings if the engraver is unavailable for the full downtimes.
3. Daily Profit Calculation
With a daily revenue of $975 and a profit margin of 25%, the daily net profit is derived by multiplying the revenue by the profit margin:
Daily Profit = Revenue × Profit Margin = $975 × 0.25 = $243.75
This figure reflects the actual profit accrued from daily operations under optimal circumstances.
4. Revenue and Profit During Downtime
Assuming the engraver is not operational for 18 days, the total profit lost is:
Profit Loss = Daily Profit × Downtime Days = $243.75 × 18 = $4,387.50
Similarly, the revenue lost during this period remains as calculated before, indicating significant earnings sacrificed due to downtime.
5. Revenue with Full Operational Days
If the engraver operates for the full 269 days in a year, the annual gross revenue will be:
Annual Revenue = Daily Revenue × Operational Days = $975 × 269 = $262,275
This projection provides a basis for evaluating potential annual earnings if the engraver remains fully functional.
6. Net Profit with Full Operational Days
Using the profit margin, the annual net profit achievable with full utilization is:
Annual Net Profit = Annual Revenue × Profit Margin = $262,275 × 0.25 = $65,568.75
This figure demonstrates the profitability of continuous operation over a calendar year.
7. Payback Period for the Investment
Finally, determining how many days it would take the engraver to generate enough profit to cover its purchase cost involves dividing the total cost by daily profit:
Payback Days = Purchase Cost / Daily Profit = $25,000 / $243.75 ≈ 102.56 days
Rounding up, it would take approximately 103 days for the engraver to generate sufficient profit to pay back its initial purchase price purely from net profits, assuming full operational efficiency and profit margins are maintained throughout this period.
Conclusion
The comprehensive financial analysis reveals that while the initial investment and loan costs are significant, the potential revenue and profits from consistent operations are substantial. The downtime risk highlighted by potential lost revenue and profits emphasizes the importance of maintenance and operational reliability. Investors and business managers should consider these calculations carefully when planning equipment acquisitions and operational strategies to ensure sustainable profitability and a quick return on investment.
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