Dan Bergstrom has approached your bank for a loan to start a hazardous waste management business. There are a number of biotechnology and chemical companies in Dan’s community, and such companies generate a fair amount of hazardous medical, chemical, and radioactive waste. Dan wants to start a business that focuses on all aspects of the waste management process; his goal is to provide for the safe and cost-effective storage, transportation, and disposal of industrial waste. Dan has approached your bank for a loan of $7 million. Under his business plan, Dan would be responsible for recruiting all of the necessary personnel, and acquiring the needed equipment and facilities for waste treatment. Dan expects to incur fixed costs of $1.5 million per year, and his expected contribution margin ratio is 60%. Dan also expects to contribute $2.5 million of equity (from himself, his family, and friends) toward setting up the business.

Required:
a. Assume that Dan’s business proposal is sound and that your bank has decided to lend Dan $7 million to start his business. What two performance measures would you like to monitor on a regular basis to ensure that your bank’s money (principal 1 interest) is recouped?
b. Rather than asking for a $7 million business loan, assume Dan has asked for a $200,000 home mortgage. What type of performance measures would you use in this scenario?
c. Why do the performance measures differ between scenarios (a) and (b)?