ASSIGNMENT: When I was in 8th grade I started to mow lawns for my neighbors to earn some extra money.1 charged $20 to $25 per lawn and was surprised at the level of interest in having me provide the service. Within 2 months I had a stable customer base of 12 clients, (which was all I wanted to handle at that time) and made about $500 for the summer. As the fall approached, I began to think about starting a "true" lawn mowing service for the following year. I knew I could recruit friends to work for me and also expand my customer base. I decided to test market the idea and see if there would be enough demand to seriously consider starting the business. I sent out flyers to all houses in walking distance (since I could not drive). Amazingly I received about 75 responses showing interest. I realized that if I was going to do this, I would need to buy lawn mowers, build a storage place for them, stock up on inventory of gas and other supplies, hire employees and think about what I would need to do to run a quality service. For simplicity assume that this business would operate 365 days a year (California or Florida based) and start as of January 1 during my 9th grade school year. Assignment: Try to fill in the work sheets attached 1. Work for a half hour and see if you can determine the annual revenue and expenses of this business as well as its earnings before tax and earnings after tax. 2. See if you can itemize the start-up cost of the business, which are separate from its ongoing expenses. Then see if you can complete the balance sheet for the first year. 3. And lastly, see if you can determine the company's free cash available at the end of the year. Assumptions: 1. I decided to start the business January 1. 2. 30 customers were retained. They were put into categories of either having small, medium or large lawns. 15 had small lawns which took 1 hour to cut; 10 had medium size lawns which took 1.5 hours to cut; 5 had large lawns which took 2 hours to cut. 3. 1 charged the equivalent of $20 per hour for mowing but communicated the price to customers as a flat charge per mow. I guaranteed that my price would not go up during the year. I billed immediately and typically received payment 30 days after. 4. Each lawn was cut 4X per month 5. I hired 6 friends and 2 back-ups (in case someone was sick), and paid each $10 for a small lawn, $15 for a medium lawn and $20 for a large lawn. They were obviously incented to work quickly, but I did not care as long as the quality of work was high.! paid my employees when they were done with each mowing. (although for the first month I delayed payment until my clients paid me). 6. The very first day of operations I purchased 2 lawn mowers for $250 each. They had a life of 5 years, (assume "straight line" depreciation which means every year my wear and tear expense is $250/Syrs for each lawn mower until the lawn mower's remaining value is all gone). The lawn mowers burned 1 gallon of gasoline per hour. 7. The very first day I also purchased a shed to store my equipment. It cost $1,500 and would hold up to six lawn mowers, gas and other supplies. The shed had a life of 20 years (assume straight line depreciation again). 8. Finally, I purchased 50 gallons of gas with containers for $2 per gallon. I figured this would give me enough gas inventory to last through a given week. I assumed I was going to replenish my gas inventory each week to always have an ample supply available (that meant I wanted to maintain the 50 gallons of gas I had on stock). 9. I decided to pay myself $20 per hour to deal with all of the operating administration and any marketing efforts of the business. At the end of the year I calculated that I spent 50 hours on marketing and 150 hours on administration. I also spent another $300 on various items like supplies, maintenance of the lawn mowers, etc. 10. Finally, I was told that the tax rate of my income was going to be about 25%. General and Administrative Expenses: Marketing @ $20/hr 50 hrs Administration @ $20/hr. 150 hrs Supplies and Maintenance EBITDA (earnings before interest, taxes and depreciation): Total Annual Depreciation: Mowers @ $500/5yrs Shed @ $1,500/20yrs Earnings Before Taxes Taxes (@0.25) Net Income After Tax