A contractor's business plan projects $750,000 in annual revenue with a 15% net profit margin. The contractor wants to purchase equipment costing $60,000. How many years of projected net profit would this equipment purchase represent?
Correct Answer
D) 0.53 years
Annual net profit = $750,000 × 0.15 = $112,500. Equipment cost as portion of annual profit = $60,000 ÷ $112,500 = 0.53 years or about 6.4 months of net profit.
Why This Is the Correct Answer
To find how many years of net profit the equipment represents, we must first calculate the annual net profit by multiplying revenue by the profit margin ($750,000 × 0.15 = $112,500). Then we divide the equipment cost by the annual net profit ($60,000 ÷ $112,500 = 0.533). This equals approximately 0.53 years, which represents about 6.4 months of net profit earnings.
Why the Other Options Are Wrong
Option A: 0.67 years
This answer of 0.75 years significantly overestimates the time period and may result from using an incorrect profit margin or making calculation errors.
Option B: 0.75 years
This answer of 0.45 years appears to be calculated incorrectly, possibly by using gross revenue instead of net profit in the denominator, or by making an arithmetic error in the division.
Memory Technique
Remember 'PED': Profit first (calculate net profit), Equipment cost second (divide by net profit), Decimal result (years of profit represented)
Reference Hint
Business and Finance Management chapter, specifically sections on profit margin calculations and equipment investment analysis
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