A contractor's business plan projects first-year revenues of $750,000 with a net profit margin of 8%. If startup costs are $125,000, what is the projected first-year net profit?
Correct Answer
C) $60,000
First-year net profit = Revenue × Net profit margin = $750,000 × 0.08 = $60,000. Startup costs are not deducted from this calculation as they represent initial investment, not ongoing operating expenses.
Why This Is the Correct Answer
The correct answer is A ($60,000) because net profit is calculated by multiplying projected revenue by the net profit margin percentage. The calculation is straightforward: $750,000 × 8% (0.08) = $60,000. Startup costs are not subtracted from this calculation because net profit margin already accounts for all operating expenses, and startup costs represent initial capital investment rather than ongoing operational costs that would affect the profit margin calculation.
Why the Other Options Are Wrong
Option A: $50,000
Option C ($65,000) is incorrect as it would require a profit margin of approximately 8.67%, which is higher than the stated 8% margin in the problem.
Option B: $75,000
Option B ($50,000) is incorrect because it appears to be based on an erroneous calculation, possibly using a 6.67% profit margin instead of the given 8%, or incorrectly attempting to factor in startup costs.
Option D: $65,000
Option D ($75,000) is incorrect because it would require a 10% profit margin, which exceeds the given 8% net profit margin specified in the business plan.
Memory Technique
Remember 'NPM = Net Profit Money' - Net Profit Margin times revenue gives you the actual net profit dollars. Startup costs are 'start-up,' not 'take-away' from profit calculations.
Reference Hint
Business and Finance for Contractors - Chapter on Financial Planning and Profit Calculations, or Florida Construction Industry Licensing Board study materials on business planning
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