A contractor is starting a new business and estimates the following startup costs: office lease deposit $5,000, equipment purchase $45,000, initial inventory $12,000, licensing fees $2,500, and working capital needs $25,000. What is the total startup capital required?
Correct Answer
A) $89,500
Total startup capital = $5,000 + $45,000 + $12,000 + $2,500 + $25,000 = $89,500. All these costs represent necessary initial investments to establish and operate the business.
Why This Is the Correct Answer
The correct answer is A ($89,500) because startup capital calculation requires adding all initial costs necessary to begin business operations. This includes the office lease deposit ($5,000), equipment purchase ($45,000), initial inventory ($12,000), licensing fees ($2,500), and working capital needs ($25,000). All these components are essential startup expenses that must be funded before the business can begin generating revenue.
Why the Other Options Are Wrong
Option B: $64,500
Option D ($62,000) is incorrect because it excludes both the working capital needs ($25,000) and the licensing fees ($2,500), significantly underestimating the total startup capital required.
Option C: $62,000
Option B ($84,500) is incorrect because it appears to exclude the $5,000 office lease deposit from the calculation, resulting in a total that is $5,000 short of the actual startup capital needed.
Option D: $84,500
Option C ($64,500) is incorrect because it excludes the $25,000 working capital requirement, which is a critical component of startup capital needed to cover operating expenses until the business becomes profitable.
Memory Technique
Remember 'OEILW' - Office, Equipment, Inventory, Licensing, Working capital - to ensure you include all startup cost categories in your calculation
Reference Hint
Business and Finance chapter, specifically sections on startup costs and capital requirements for new construction businesses
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