Melissa Parker is considering the merits of buying a small caf in Adelaide. The caf is fully furnished and equipped. The business has been operating for the last 3 years. The caf premises are not owned, but leased. The current lease expires in two years, but there are options for a further five-year term in place. The current lease costs $30,000 per annum in rent.

The current owner, Philip Taylor, started the business in 2017 with a capital of $75,000. He is asking for a price of $100,000 for the business. Philip provided the following information:

Table 1 : info for the year
Sales revenue	400000
Cost of sales	175000
Gross profit	225000
Other expenses	277000
loss	-52000

Upon a request from Melissa, Philip provided the following information about the other expenses of $277,000 from the records of the business:

Table 2 Information about other expenses

Coffee machine	$ 100000
insurance	6000
Computer & software	15000
Telephone usage	4000
Interest paid to bank	2000
Car maintenance expense	8000
furniture	50000
Servicing of coffee machines	8000
internet	2000
electricity	10000
Water bill	7000
Advertising & membership	25000
Lease rent	30000
Shop cleaning	10000
Total		$ 277000

In addition, Philip informed the following:

• The business took a bank loan of $50,000, which is repayable in 2024.
• Accounts payable and cash balance as at June 30, 2020 are $5,000 and $31,500 respectively.
• The owner takes out $500 every week from the business.
• All sales are cash sales.

Following detailed discussions with Philip, Melissa discovered that:

• No attempt has been made to segregate personal and business expenses. Electricity, water and car maintenance were estimated to be 80% business and 20% owners personal purposes.
• The coffee machine, computers & software and furniture were bought on July 1, 2019 and estimated to have a useful life of 5 years each.
• Tax rate of 30%

Questions

Melissa expects a 25% return on investment (return on equity) from this business. Would the business be able to generate this rate of return?