Managerial Econ

Mr. Lee operates a green grocery in a building he owns in one of the outer boroughs of New York City. Recently, a large chemical firm offered him a position as a senior engineer designing plants for its Asian operations. (Mr. Lee has a master’s degree in chemical engineering.) His salary plus benefits would be $95,000 per year. A recent annual financial statement of his store’s operations indicates the following:

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Revenue $625,000

Cost of goods sold 325,000

Wages of workers 75,000

Taxes, insurance, maintenance, and

depreciation on building 30,000

Interest on business loan (10 %) 5,000

Other miscellaneous expenses 15,000

Profit before taxes $175,000

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If Mr. Lee decides to take the job, he knows that he can sell the store for $350,000 because of the goodwill built with a steady clientele of neighborhood customers and the excellent location of the building. If he would still hold onto the building, he knows he could earn a rent of $50,000 on this asset. If he did sell the business, assume he would use some of the proceeds from the sale to pay off his business loan of $50,000. He could then invest the difference of $300,000 (i.e., $350,000 – $50,000) and expect to receive an annual return of 9 percent. Should Mr. Lee sell the business and go to work for the chemical company?

In answering this question, also consider the following information:

a. In his own business, Mr. Lee works between 16 and 18 hours a day, 6 days a week. He can expect to work between 10 and 12 hours a day, 5 days a week, in the chemical company.

b. Currently, Mr. Lee is assisted by his wife and his brother, both of whom receive no salary but share in the profits of the business.

c. Mr. Lee expects his salary and the profits of his business to increase at roughly the same rate over the next 5 years.