Exhibit or Question Guidance:Question 2 Profit Calculations Diagon Alley Original Profit:Overhead: $108K/yearInsurance: $1,900/month * 12 = $22,800Tax: $600/month * 12 = $7,200Total Yearly Costs: $138,000Total Yearly Profit = $240,000 - $138,000 = $102,000New Stores Profit:Overhead: $156K/yearInsurance: $2,800/month * 12 = $33,600Tax: $1,200/month * 12 = $14,400Total Yearly Costs: $204,000Total Yearly Profit = $360,000 - $204,000 = $156,000 INCREMENTAL YEARLY PROFIT = $54,000ROI Calculation:Capex for new store = $200K$200k/$54K = 3.7 years <- perfectly okay for candidate to round here as long as they realize they recoup the investment within 4 years of opening

Hello!The reason you only need to use the incremental yearly profit is because the second calculation is for the two stores taken together, not just the second store:Store 1 net profit = $102,000Store 1 + Store 2 net profit = $156,000Store 2 incremental yearly profit to the company = $54,000Given you are already making $102,000 from the first store, adding the second store will make you an additional $54,000. Your investment of $200,000 results in this additional $54,000, so you use this number to calculate how long it takes to recoup your investment.Best,Maria

Hey there, Because we are investing $200k in a new store, we want to know how long that new venture takes to repay itself. So we look at its:Incremental revenes ($360k), lessIncremental costs ($204k), giving usIncremental profit ($56k) Thereby $200k/$54K = 3.7 yearsAll the best

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Anonymous A

on Jan 30, 2025

Global

Why do we have to calculate the Payback period with the incremental profits and not only with the profits from the second store?

Exhibit or Question Guidance:

Question 2 Profit Calculations Diagon Alley Original Profit:

Overhead: $108K/year
Insurance: $1,900/month * 12 = $22,800
Tax: $600/month * 12 = $7,200
Total Yearly Costs: $138,000
Total Yearly Profit = $240,000 - $138,000 = $102,000
New Stores Profit:
Overhead: $156K/year
Insurance: $2,800/month * 12 = $33,600
Tax: $1,200/month * 12 = $14,400
Total Yearly Costs: $204,000
Total Yearly Profit = $360,000 - $204,000 = $156,000 INCREMENTAL YEARLY PROFIT = $54,000
ROI Calculation:
Capex for new store = $200K
$200k/$54K = 3.7 years <- perfectly okay for candidate to round here as long as they realize they recoup the investment within 4 years of opening

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