A contractor estimates startup costs of $75,000 for equipment, $25,000 for initial inventory, $15,000 for insurance premiums, and $10,000 for working capital. They can finance 70% of the total. How much cash do they need?
Correct Answer
C) $37,500
Total startup costs = $75,000 + $25,000 + $15,000 + $10,000 = $125,000. Cash needed = 30% of $125,000 = $37,500.
Why This Is the Correct Answer
The correct answer is C because we must first calculate the total startup costs by adding all components: $75,000 + $25,000 + $15,000 + $10,000 = $125,000. Since the contractor can finance 70% of the total, they need to provide 30% in cash. 30% of $125,000 equals $37,500, which represents the cash down payment required.
Why the Other Options Are Wrong
Option A: $25,500
Option A ($25,500) represents only about 20.4% of the total startup costs, which would be incorrect since the contractor needs to provide 30% cash down payment.
Option B: $30,000
Option B ($30,000) represents 24% of the total startup costs, which falls short of the required 30% cash down payment needed.
Option D: $42,000
Option D ($42,000) represents 33.6% of the total startup costs, which exceeds the required 30% cash down payment and would be more than necessary.
Memory Technique
Remember 'EIIW' for startup costs: Equipment, Initial inventory, Insurance, Working capital - then apply the 100% minus financing percentage rule
Reference Hint
Business and Finance chapter covering startup capital requirements and financing calculations
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