ECE 472S – Engineering Economic Analysis & Entrepreneurship
Problem Sets
Note: Solutions for these problem sets are available on Blackboard. Suggested practice problems from the textbook are listed on the
course outline and should be completed prior to attempting these problem sets.
PROBLEM SET # 1 (suggested completion date: January 29th, 2010)
1. In late 2007, two recent computer-engineering graduates decided that they wanted to form a partnership
to establish a store to sell IBM compatible computers. They were initially disappointed because the bank manager
refused their loan request for the $300 000 their business model showed that they needed. They then approached
their families for financing and after much discussion the following arrangement was arrived at. Each family
would put $125 000 into the business as equity. Ownership in the company would be split four ways. Each of the
two families would receive a share and each of the engineers would receive a share. Furthermore, it was agreed
that the engineers would run the store on a full-time basis and would each be paid $25 000 a year as their salary
draw from the business for the first few years. With the equity funding in place, they were now able to secure a
bank loan of $50 000; one quarter of the loan was payable at the end of May 2008 and the remaining three
installments due every six months thereafter.
The partners were also able to obtain a good retail location in a mall but to do so required a prepayment
of four months’ rent at $3 500 per month. They equipped the store, the office and the shop with equipment and
furnishings totaling $60 000, which they paid in cash. They purchased computer motherboards, power supplies,
disk/diskette drives, cabinets and cables from a number of suppliers which totaled $150 000. Because they did not
have an established credit rating, two-thirds of these purchases were cash on delivery; the rest were invoiced on a
net 30-day basis. The store opened on January 1, 2008. Prepare an opening balance sheet for this business which
they decided to call "Computer One". (Ignore any taxes.)
2. The two engineers worked hard at establishing their new business during the first year and hired a small
staff of part-time employees to help with the sales and repairs. After twelve months of operations, the partners
believed that they had enjoyed a good year. Sales of the machines had been strong and they were constantly busy.
They were anxiously awaiting the accountant's report for their first year of operations to see how well financially
they had done. During the first year of operation, the following financial activity occurred:
Gross sales 1 500 000 Advertising 45 000
Purchases 950 000 Utilities 12 000
Sales Staff Salaries 70 000 Interest 4 000
Technical Staff Salaries 55 000
Inventory as of December 31, 2008 was $125 000. The business paid its expenses on receipt of invoice except
that it had not yet paid for the last shipment of computer purchases that it received in late December. This invoice
was for $200 000. Computer One accepted payment by cash, certified cheque or credit card. December's credit
card sales were $100 000 and this amount had not yet been received from the credit card companies. The
chartered accountant decided to depreciate the office and store equipment at an annual rate of $15 000.
To remain competitive, Computer One offered a three-year warranty on all systems that it sold. The partners
estimated that the cost to the business to repair systems sold this year under the warranty would be would be 1.0%
and 2.0% of sales for year two and year three respectively. Prepare an income statement for the first year.
3. Prepare a Balance Sheet as at the end of the first year. What Owners’ Equity did the chartered accountant
determine as of December 31, 2008?
4. By using appropriate financial ratios that measure profitability and return on investment, had the business
done well during the first year? Evaluate the engineers’ compensation for the year as well as the return on
investment for the families. Had each of the partners done well?
NB: All financial statements should be presented in proper accounting format. Show your work in supporting worksheets.
