Mary tells John that she would be happy to build the model. John mentions that he will need to hire 3 additional engineers to continue to refine and expand the product. Each engineer makes approximately $120,000 per year. In addition, he will need two VPs of marketing. One to sell the product to the action sports industry and one to sell the product to traditional bicycle, running and fitness shops. Each VP will command a salary of $150,000 per year. In addition, they will manage 3 sales people each, six total within the Company, at approximately $80,000 per annum. The marketing budget, for advertising and other materials, will be $350,000 for each marketing group per year or $700,000 for the Company as a whole. Marketing expenses are expected to be spent in an equal amount per month. The initial back office will contain an accountant @ $80,000 and two receptionists/secretaries @ $40,000. Additional salary expenses, including payroll taxes, health insurance and other benefits, are budgeted at 30% of total salaries. John hopes to make a salary of $175,000. Annual office expenses including occupancy are expected to be $25,000. John expects his salary expenses to increase by 5% in the second year and the other expenses to increase by 10%. Capital expenses include a computer for each individual, $1,000, two network printers, $1,000, telephone, $1,000, two servers, $5,000 each, software, $10,000, and networking, $1,000. John expects his gross margin as a % of sales to be 50%. The sales price of the Iron Fit will be $125.00 to stores with the retail price being approximately $160.00. John is planning to keep the sale price constant in the second year in order to grab more market share. Please complete an initial model for Johns company for the first two years. (This will require a month by month analysis.) What is the amount of capital needed? Assuming a required rate of return by investors of 20% per annum and the sale of the company at the end of the second year at seven times Year 2 EBITDA what is the company worth? (Please note that when discounting monthly cash flows you will need to divide the interest rate by 12.) What do you think about this deal? What questions do you need to ask if you were an investor?

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