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
D) $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: $42,000
Option B ($30,000) represents 24% of the total startup costs, which falls short of the required 30% cash down payment needed.
Option B: $25,500
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
More Business & Finance Questions
A general contractor purchases equipment worth $45,000 with a useful life of 9 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
What is the typical recommended coverage amount for general liability insurance for a small to medium-sized general contracting business?
When establishing professional relationships with architects and engineers, what is the most important factor for a general contractor to consider?
A partnership agreement for a construction company should address all of the following EXCEPT:
A contractor purchases a truck for $60,000. After 5 years, it has accumulated depreciation of $35,000. What is the truck's book value?
A contractor's business plan projects first-year revenue of $500,000 with a 15% net profit margin. If actual revenue is $450,000 with the same profit margin, what is the variance in net profit?
Using the Modified Accelerated Cost Recovery System (MACRS), construction equipment is typically depreciated over how many years?
A contractor is comparing financing options for equipment purchase. Option A: $80,000 cash purchase. Option B: $20,000 down, $65,000 financed at 6% for 4 years. What is the total cost of Option B?
A contractor purchases equipment using a capital lease with a present value of $120,000. How should this be recorded on the balance sheet?
A contractor operates as an S-Corporation. How are business profits and losses typically handled for tax purposes?
People Also Study
Related Study Resources
Previous Question
A material supplier offers terms of 1/15 net 45 on a $100,000 invoice. The contractor has sufficient cash flow to pay early. What is the annualized interest rate equivalent of taking this discount?
Next Question
A 55-year-old experienced carpenter applies for a position but is not hired. The employer states the job requires someone who can 'keep up with the young crew' and has 'fresh energy.' This could potentially violate which law?