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Sarah McMahon is considering the merits of an opportunity to run a business. There is a small motel available for sale in a small town, which has a reputation for being something of an arty town. There is already an art gallery there, together with a choir and a hall which is used for visiting performers. The location is close to a very popular national park. The town is also situated by the side of Blue Lake with a number of tourist attractions.

The motel is fully furnished and equipped. The business has been operating for the last 10 years. The purchase price for the business is $150,000. However, the motel building is not owned, but leased. The current lease expires in four years, but there are options for at least two further five-year terms in place. The current lease costs $62,000 per annum in rent. The motel has 15 cabins/rooms, 12 of which have double rooms. There are a further three family rooms and each of these has a capacity to accommodate five people. The motel is graded as a three-star facility. There is a two-bedroom residence for the manager/owner as well. A full breakfast menu is provided at a charge as part of the motel service.

A real estate agent, managing the sale of the business, provided the following information for the year ended June 30, 2020:

Table 1: Information about last year	$
Gross income	400,000
Direct expenses (house-keeping and cleaning)	150,000
Gross profit	250,000
Other expenses	175,000
Profit before tax	75,000
Tax expense	22,500
Net profit after tax	52,500

Upon a request from Sarah, the agent provided the following information about the other expenses of $175,000 (as shown in table 1) from the records of the business:

Table 2: Information about other expenses	$
Bank charges	1,600
Carpet cleaning	1,200
Council registration fees	1,500
New towels and curtains	9,000
Insurance	8,000
Repair and maintenance	13,500
Pool chemicals and cleaning	8,000
Newspapers	1,200
Accountancy fee	3,000
Electricity	12,000
Water	3,000
Miscellaneous expenses	10,000
Software, internet and computers	14,000
Advertising and memberships	14,000
Telephone	4,000
Car maintenance expenses	9,000
Lease rent	62,000
Total other expenses	175,000

Following detailed discussions with the vendor, Sarah discovered that:

• No attempt has been made to segregate personal and business expenses. Electricity, water, car maintenance and lease rent were estimated to be 90% business and 10% owners personal purposes.
• The owner takes out $600 every week from the business. This has reduced the amount of income reported in Table 1.
• The towels and curtains and software, internet and computers were bought last year (on July 1, 2019) and are assumed to have a useful life of 3 years each. Tax rate of 30%

Questions

1. Discuss why the aggregate numbers (i.e., not separating the figures into those relating to personal or business aspects) may cause problems for decision-making
2. Prepare a Statement of Financial Performance to calculate the profit for the business. Show each of the expenses listed on table 1 and 2 on the Statement of Financial Performance.

3. Sarah expects a 25% return on investment from this business. Would Sarah be able to generate this rate of return from the business?

4. What other factors (financial and non-financial) might be worth considering by Sarah in reaching a final decision?

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