Steve Surface has approached your bank for a loan to start a hazardous waste management business. There are many biotechnology and chemical companies in Steve's community, and such companies generate a fair amount of hazardous medical, chemical, and radioactive waste. Steve 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.
Steve has approached your bank for a loan of $7 million. Under his business plan, Steve would be responsible for recruiting all of the necessary personnel, and acquiring the needed equipment and facilities for waste treatment. Steve expects to incur fixed costs of $1.5 million per year, and his expected contribution margin ratio is 60%. Steve also expects to contribute $2.5 million of equity (from himself, his family, and friends) toward setting up the business.
Required:
a. Assume that Steve's business proposal is sound and that your bank has decided to lend Steve $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 + interest) is recouped?
b. Rather than asking for a $7 million business loan, assume Steve 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)?