Question

You are given a $200,000 loan to start a business with the interest rate of 3%. How would you invest this money to be able to pay back the loan in 5 years and also make as much profit as you can?

Describe the type of business that you would start and include the estimation of one-time cost and recurring cost. Your projects cannot be similar; otherwise, all similar projects will receive zero credit.

Show your calculations; explain the basis of your assumptions, costs, and other items you consider.

Answer 1

Loan amount:- $200000

Rate of interest:- 3%

Time period to repay the loan amount:- 5 years

the formula for calculating EMI (Flat Rate) for this loan would be:- [principle +{principle*rate*time}]/(time*12)

by putting the above data, EMI comes as $9583.

So, the bottom line is to start a business that can earn profit more than $9583 to repay the loan.

There can be mainly two ways to earn that much amount of return. First is to invest the money in someone else's business by buying the shares of the business and get back the return to repay the loan. it is the easiest way the repay the loan and get the profit as we can see from the historical data of NYSE that it has return more that 3% in all previous years except in 2005.

The other one is to start your business. lets consider our business be of trading goods i.e. buying and selling goods.

For starting a business, we require following things to start:-

1. rent a place to start a business and other fixed costs
2. administrative expenses like electricity bill, water bill, transportation cost etc
3. cost of goods,
4. office salaries
5. marketing expenses

following are the financials of the trading business for 5 years:-

	2019	2020	2021	2022	2023
Revenue by sales	$550,000	$605,000	$665,500	$732,050	$805,255
Cost of good	$440,000	$484,000	$532,400	$585,640	$644,204
Selling and general administrative expenses	$35,000	$38,500	$42,350	$46,585	$51,244
Marketing expenses	$30,000	$33,000	$36,300	$39,930	$43,923
Interest expenses	$9,583	$9,583	$9,583	$9,583	$9,583
Other operating expenses	$20,000	$22,000	$24,200	$26,620	$29,282
Operating profit	$15,417	$17,917	$20,667	$23,692	$27,019
Taxes (35%)	$5,396	$6,271	$7,233	$8,292	$9,457
Profit	$10,021	$11,646	$13,434	$15,400	$17,563

from the above financials, we can conclude that sale is increasing by 10% on year on year basis as well as all the expenses, but the interest expense is constant through out the year. It can be concluded from the above figure that the loan taken to start a business is a good choice.