Mr. Ahmad thinks that he has enough experience and should do his own business, opening up his
Question:
Mr. Ahmad thinks that he has enough experience and should do his own business, opening up his own consulting firm. He estimates that he needs $1,000,000 for starting up his business. He has $400,000 on his investment/savings account, which earns yearly %2 higher than inflation rate and he will use his all savings and get 3-year murabaha (loan) of $600,000 from his financial institution to open up his business. He will pay $200,000 principle each year and the current and next year’s pre-determined financing rates is %25, but it will increase to %30, and %40 in the following years respectively according to the contract. According to his employment contract, if he quits his job before completing 10 years, %50 of his indemnity will be cut. Furthermore, if he starts his business, due to the business nature, he will have 6 days weekly work including Saturdays and based on this, his projected revenues during the 3-year period of operation are $1,500,000, $2,000,000, and $3,000,000.
On the other hand, his expected expenses for the first year are as follows:
• Monthly total salaries to employed people are $80,000.
• Yearly supplies and equipment expenses are $150,000.
• He has $600,000 rent contract of 3 years, each year of $200,000 for the office. The rent will be fixed for 3 years.
• Monthly total utilities are $5,500.
• One-time license and certification from the government is $25,000.
• The country has a business income tax scheme of no income tax until $100,000. However, it will be %10 between $100,000 and $250,000 and %20 between $250,000 and $500,000, and %30 if it is greater than $500,000.
• Yearly expected inflation rate is %20, 25%, and 30% respectively for the next 3-years. Thus, all expected expenses are projected to increase with inflation rate if not mentioned otherwise.
Based on then assumptions and projections given above;
e) Briefly discuss whether Mr. Ahmad should quit his current job and start his own business based on the three-year projection.
Auditing An International Approach
ISBN: 978-1259087462
7th edition
Authors: Wally J. Smieliauskas, Kathryn Bewley