Question

in the analysis of the potential equity acquisition is an assessment of each company’s current and future profitability. Your manager has provided you with copies of each company’s income statement (see below). Next, you are to calculate the expected return on the investment for each company. You have been asked to discuss any other issues that you believe are relevant to the investment decision.

first

Auto Wash Bot Ltd. (AWBL) has recently completed the research and development of a new touch screen app for all mobile devices. This new technology is both more user friendly than the current technology on the market. Auto Wash Bot Ltd has just signed a major contract to provide the Auto Wash Bot terminal to a major producer of mobile devices. The founder of the business would like to sell a 50% interest in the business for $100,000 in order to finance further expansion of operations.

Auto Wash Bot Ltd.

Income Statement

For the Year Ended December 31, 2015

Revenue	$375,000
Cost of Goods Sold	86,250
Gross Profit	288,750
Other Expenses
Advertising	35,400
Office Expense	22,750
Research	195,000
Wages and Salaries	40,000
Total Other Expenses	293,150
Income Before Taxes	(4,400)
Income Tax	0
Net Income	$(4,400)

Second

Popeye’s Muscle Wash Ltd (PMWL) is a self-service, coin operated car wash located in a busy residential area. The company provides all of the services of a typical car wash, including soap, wax, vacuuming as well as pressure washing. PMWL has been long established and enjoys the loyalty and repeat business of many local residents. The current owner is getting up in age and would like to sell 100% ownership interest in the business for $100,000 to pursue retirement. The current year’s income statement is consistent with prior years

Popeye’s Muscle Wash Ltd

Income Statement

For the Year Ended December 31, 2015

Revenue	$375,000
Cost of Goods Sold	163,125
Gross Profit	211,875
Other Expenses
Advertising	5,200
Office Expense	17,400
Repairs and Maintenance	85,000
Wages and Salaries	50,000
Total Other Expenses	157,600
Income Before Taxes	54,275
Income Tax*	8,413
Net Income	$45,862

Answer 1