Sunflower, Inc. is considering obtaining a bank loan to finance a new unit. The company is required by the bank to submit GAAP-compliant accounting records (which they currently do not keep). Sunflower has contracted with your consulting firm to estimate the costs and benefits of this new unit. Management provides you with the following information regarding their financial position:
Expected performance next month (before considering the potential investment):
The loan contract has the following information:
Bank loan: $65,000
Interest rate: 1% per month, payable at the end of the month. Interest rate increases to 1.25% per month if the company suffers a net Operating Loss before Interest and Taxes that month (by GAAP standards).
After evaluating the company, you report the following estimates:
$\bullet$Monthly cost of keeping a second set of accounting records: $650
$\bullet$Potential return on investment: 2% per month (through increased sales, after considering the costs involved).
Would you recommend that Sunflower take out the loan (i.e. would it be profitable for them)?

Question

Sunflower, Inc. is considering obtaining a bank loan to finance a new unit. The company is required by the bank to submit GAAP-compliant accounting records (which they currently do not keep). Sunflower has contracted with your consulting firm to estimate the costs and benefits of this new unit. Management provides you with the following information regarding their financial position:
Expected performance next month (before considering the potential investment):
  The loan contract has the following information:
Bank loan: $65,000
Interest rate: 1% per month, payable at the end of the month. Interest rate increases to 1.25% per month if the company suffers a net Operating Loss before Interest and Taxes that month (by GAAP standards).
After evaluating the company, you report the following estimates:
$\bullet$Monthly cost of keeping a second set of accounting records: $650
$\bullet$Potential return on investment: 2% per month (through increased sales, after considering the costs involved).
Would you recommend that Sunflower take out the loan (i.e. would it be profitable for them)?

Quizplus · Accepted Answer

The Answer of Sunflower, Inc. is considering obtaining a bank loan to finance a new unit. The company is required by the bank to submit GAAP-compliant accounting records (which they currently do not keep). Sunflower has contracted with your consulting firm to estimate the costs and benefits of this new unit. Management provides you with the following information regarding their financial position:
Expected performance next month (before considering the potential investment):
  The loan contract has the following information:
Bank loan: $65,000
Interest rate: 1% per month, payable at the end of the month. Interest rate increases to 1.25% per month if the company suffers a net Operating Loss before Interest and Taxes that month (by GAAP standards).
After evaluating the company, you report the following estimates:
$\bullet$Monthly cost of keeping a second set of accounting records: $650
$\bullet$Potential return on investment: 2% per month (through increased sales, after considering the costs involved).
Would you recommend that Sunflower take out the loan (i.e. would it be profitable for them)?

Sunflower, Inc ∙\bullet∙ Monthly Cost of Keeping a Second Set of Accounting Records

Sunflower, Inc $\bullet$ Monthly Cost of Keeping a Second Set of Accounting Records