Potential Retirement

. Potential Retirement
Through good years and not so good, Mr. Moore maintained that he enjoyed the business and wanted to stay in business as long as possible, particularly in order to participate in the current economic boom. But, Mr. Moore is in his 60’s. He is concerned about the business’ future as well as his own. On the one hand he says he would like to “run the business as always, for as long as I’m able”; on the other hand he has been heard to say “it gets harder all the time. Maybe I should just pack it in.”
At the end of 2013 Mr. Moore asked if he would be able to retire at that time. The consulting team evaluated selling the business for its book value (Owner Equity). The team would use the Owner Equity in the business realized from a sale in order to buy an investment that would pay Mr. Moore 3% per year (paid annually in one payment). At the end of 2013 Mr. Moore was 61 years old. It was suggested that he plan to live until he is 100 to make sure his money lasts, thus the money would be invested for 40 years. Mr. Moore said he’d consider retiring if the investment could produce $100,000 per year for his retirement so he can indulge in his passions – badminton, bocce and butterflies.
 

  1. Ongoing Operations

Use data below for questions 17-23 in this section and the data in the MS Excel attachment to calculate a budget for 2015. Hint: You may find it helpful to create a “standard” P&L which states all data as a percent of sales. Some “planning” questions will provide all needed data in the questions themselves.
Mr. Moore believes that roughly 8% more meals can be served in 2015 (due to the new strategy kicking into high gear) so he plans to serve 261,714 meals in 2015. He also plans to adjust prices so an average meal will be $7.35 per meal. Hint: “Sales” have been calculated as number of meals served x average price per meal.
The consulting team believes that the cost of product (calculated as a percent of sales) can be 35% of sales in 2015. Mr. Moore wants to keep the good staff he hires and so is planning to give “cost of living raises” of 2.5% over 2014 in the next year. Benefits will remain at the current 35% of the labor cost next year. The utility companies have advised all business customers that rates will increase by 15% next year.
According to the loan agreement, there will be no repayment of principle on the revolving line of credit (since we are currently in the draw period). Hence payments being made are just interest payments which are expected to be $3,000 total in 2015. Because of agreements with the city and the insurance company (from whom he received his loan) taxes and insurance will remain the same in 2015. Likewise depreciation expense will remain the same as in 2014.*
Service costs are expected to grow by 15% next year plus an added $55,000 is to be budgeted for extra accounting services. Other Expenses (GSA, advertising and promotion and other) are expected to increase by 10% from 2014. The heavy advertising of the new restaurant should not be necessary and there’s been time to plan for some other efficiencies. The income tax rate is expected to be 28% of EBITD which is reduced for interest and depreciation, the same percent of EBITD as in 2014.
 
* These values have been entered on the worksheet; there is no need to calculate these amounts. Calculate and enter only those amounts on the exam with question numbers’ shown.

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Author Since: November 30, 2020

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