Korey's comic book store has been up and running for 4 years. Korey feels that his store has been successful and is considering moving to a larger property to allow for greater inventory and customer opportunities in his business. He would like investors to cover the cost of his expansion.
The profits of Korey's comic book store for its first four years are outlined below. According to this information, what would be the best estimate for Korey to quote as expected profits in the next year in his new business plan?
| Year | Net Profits |
|------|-------------|
| 1 | $14,250.00 |
| 2 | $15,390.00 |
| 3 | $16,621.20 |
| 4 | $17,950.90 |
| 5 | |
A. $20,550.19
B. $19,090.90
C. $19,280.60
D. $19,386.97
Answer (2)
To estimate Korey's profits for Year 5, we calculated an average percentage increase of approximately 8% based on the previous four years' profits. Applying this average to the Year 4 profit of $17,950.90, the expected profit for Year 5 is $19,386.97. Hence, Korey should quote $19,386.97 in his business plan.
;
Calculate the percentage increase from Year 1 to Year 2: 8% .
Calculate the percentage increase from Year 2 to Year 3: 8% .
Calculate the percentage increase from Year 3 to Year 4: 8% .
Apply the average percentage increase to the profit in Year 4 to estimate the profit in Year 5: $19 , 386.97 .
Explanation
Calculate Percentage Increases First, we need to calculate the percentage increase in profits from year to year. This will help us estimate the expected profit for the next year.
Year 1 to Year 2 Increase The profit in Year 1 is $14 , 250.00 and in Year 2 is $15 , 390.00 . The percentage increase from Year 1 to Year 2 is calculated as: Profit in Year 1 Profit in Year 2 − Profit in Year 1 × 100 = 14250 15390 − 14250 × 100 = 14250 1140 × 100 = 8%
Year 2 to Year 3 Increase The profit in Year 2 is $15 , 390.00 and in Year 3 is $16 , 621.20 . The percentage increase from Year 2 to Year 3 is calculated as: Profit in Year 2 Profit in Year 3 − Profit in Year 2 × 100 = 15390 16621.20 − 15390 × 100 = 15390 1231.20 × 100 = 8%
Year 3 to Year 4 Increase The profit in Year 3 is $16 , 621.20 and in Year 4 is $17 , 950.90 . The percentage increase from Year 3 to Year 4 is calculated as: Profit in Year 3 Profit in Year 4 − Profit in Year 3 × 100 = 16621.20 17950.90 − 16621.20 × 100 = 16621.20 1329.70 × 100 ≈ 8%
Calculate Average Increase Now, we calculate the average percentage increase over the three years: Average Percentage Increase = 3 8 + 8 + 8 = 8%
Estimate Year 5 Profit To estimate the profit for Year 5, we apply the average percentage increase to the profit in Year 4: Estimated Profit in Year 5 = Profit in Year 4 × ( 1 + Average Percentage Increase ) Estimated Profit in Year 5 = 17950.90 × ( 1 + 0.08 ) = 17950.90 × 1.08 = $19 , 386.97
Final Answer Therefore, the best estimate for Korey to quote as expected profits in the next year is $19 , 386.97 .
Examples
Estimating future profits is a crucial aspect of business planning. For example, if Korey wants to secure a loan for his expansion, he needs to present a business plan that includes projected profits. Banks and investors will scrutinize these projections to assess the risk and potential return on their investment. By analyzing past performance and estimating future growth, Korey can make informed decisions about his business and attract the necessary funding for his expansion.
