Sharice is the owner of a small business called Lil’ Local Goodies. She started the business two years ago, selling homemade crafts and baked goods out of her garage. Quickly, Sharice expanded to selling products made by friends and family too. Half of the proceeds from these sales go back to the producer, but Sharice gets to keep the other half. Here are some of Sharice’s numbers from the past two years, as well as projected numbers for the upcoming year:
Accounts 2020 2021 2022
Revenues:
Sales of own crafts $3,450 $2,870 $3,000
Sales of others’ crafts 1,530 6,740 12,500
Sales of own baked goods 2,110 1,960 2,000
Sales of others’ baked goods 1,840 13,000
Total revenues 8,930 30,500
Expenses
Cost of goods sold- crafts 560 470 500
Cost of goods sold- baked goods 780 650 700
Rental 0 0 2,000
Salary 0 0 1,500
Meals and Entertainment 0 320 500
Advertising 200 1,000 2,000
Accounting
Total expenses
Sharice’s numbers are under the assumption that she will rent a booth at the local farmer’s market for two weeks in the summer, hiring her nephew to run it for $750 a week. The added sales front and marketing effort is expected to give Sharice’s sales volume a 20% boost next year (already included in the projections).
Sharice is considering buying a new woodworking machine that will allow her to work more quickly, increasing her crafts production by 33% each year. The machine would cost $2,000 and last four years (no salvage value). Sharice is wondering if this is a smart investment, considering her current trends/projections for craft sales. To finance the machine, Sharice can sign a $2,000 bank note due at the end of three years. Interest will be charged at a 5.50% rate and due at the end of each month. Alternatively, a friend has offered Sharice the $2,000 for a 5% equity stake in her business. Sharice is wondering which financing option would work better for her.
Sample Solution