Korey's comic book store has been up and running for 4 years. Korey feels that his store has been successful and is considering moving to a larger property to allow for greater inventory and customer opportunities in his business. He would like investors to cover the cost of his expansion.
The profits of Korey's comic book store for its first four years are outlined below. According to this information, what would be the best estimate for Korey to quote as expected profits in the next year in his new business plan?
| Year | Net Profits |
|------|-------------|
| 1 | $14,250.00 |
| 2 | $15,390.00 |
| 3 | $16,621.20 |
| 4 | $17,950.90 |
| 5 | |
A. $20,550.19
B. $19,090.90
C. $19,280.60
D. $19,386.97
Answer (1)
Calculate the percentage increase in profit from Year 1 to Year 2, Year 2 to Year 3, and Year 3 to Year 4.
Find the average of these percentage increases.
Apply this average percentage increase to the profit of Year 4 to estimate the profit for Year 5.
The estimated profit for Year 5 is $19 , 386.97 .
Explanation
Analyzing the Problem First, let's analyze the given data. We have the net profits for the first four years of Korey's comic book store. We need to estimate the profit for the fifth year. To do this, we will calculate the percentage increase in profit from year to year and then find the average percentage increase. Finally, we'll apply this average increase to the fourth year's profit to estimate the fifth year's profit.
Calculating Percentage Increase (Year 1 to Year 2) Now, let's calculate the percentage increase from Year 1 to Year 2: Year 1 Profit Year 2 Profit − Year 1 Profit = $14 , 250.00 $15 , 390.00 − $14 , 250.00 = $14 , 250.00 $1 , 140.00 = 0.08 So, the percentage increase from Year 1 to Year 2 is 8%.
Calculating Percentage Increase (Year 2 to Year 3) Next, let's calculate the percentage increase from Year 2 to Year 3: Year 2 Profit Year 3 Profit − Year 2 Profit = $15 , 390.00 $16 , 621.20 − $15 , 390.00 = $15 , 390.00 $1 , 231.20 = 0.08 So, the percentage increase from Year 2 to Year 3 is 8%.
Calculating Percentage Increase (Year 3 to Year 4) Now, let's calculate the percentage increase from Year 3 to Year 4: Year 3 Profit Year 4 Profit − Year 3 Profit = $16 , 621.20 $17 , 950.90 − $16 , 621.20 = $16 , 621.20 $1 , 329.70 = 0.08 So, the percentage increase from Year 3 to Year 4 is 8%.
Calculating the Average Percentage Increase Now, we calculate the average percentage increase: 3 0.08 + 0.08 + 0.08 = 0.08 So, the average percentage increase is 8%.
Estimating the Profit for Year 5 Now, we estimate the profit for Year 5 by applying the average percentage increase to the profit of Year 4: Year 5 Profit = Year 4 Profit × ( 1 + Average Percentage Increase ) Year 5 Profit = $17 , 950.90 × ( 1 + 0.08 ) = $17 , 950.90 × 1.08 = $19 , 386.97 Therefore, the estimated profit for Year 5 is approximately $19,386.97.
Selecting the Best Estimate Comparing our estimated profit for Year 5 ($19,386.97) with the given options, we find that option d. $19,386.97 is the closest.
Final Answer Therefore, the best estimate for Korey to quote as expected profits in the next year in his new business plan is $19 , 386.97 .
Examples
Estimating future profits is a crucial aspect of business planning. For instance, if Korey wants to secure a loan for expanding his comic book store, he needs to provide a business plan that includes projected profits. Banks and investors use these projections to assess the viability of the business and the risk associated with lending money. By analyzing past performance and estimating future growth, Korey can present a compelling case for investment, demonstrating the potential for a successful expansion and increased profitability. This same method can be applied to various business scenarios, such as predicting sales, managing inventory, and making informed financial decisions.
