Answers Activity 157


In 1967 Mr. Ed Carswell, a chemical engineer, began experimenting in his spare time with a new method for processing fresh orange juice. By 1970, he had perfected the process to such an extent that he was ready to begin production in a small way. His process enabled him to extract 18 percent more juice from oranges than was typically extracted by a pressure juicer of the type currently used in cafes. His process also removed some of the bitterness which got into the juice from the peelings when oranges were squeezed without peeling them.

Mr. Carswell patented the process and then started production. Since his capital was limited, he began production in a small building which previously had been a woodworking shop. With the help of his brother, Mr. Carswell marketed the juice through local restaurants. The juice was distributed in glass jugs, which proved to be rather expensive because of high breakage. The new product was favorably accepted by the public, however, and the business proved to be a success.

Before he had an opportunity to contact the bank to borrow money, Mr. Carswell was introduced to Mr. Bernie Lubo, a plastics engineer, who produced plastic containers. Mr. Carswell mentioned his own problems in the expansion of his business. Mr. Lubo wanted to finance expanded juice production with the understanding that plastic containers would be used for marketing the orange juice. He would lend the money interest free, but he was to receive 40 percent of the net profits for the next ten years. Distribution and advertising were to be done through a local broker for 25 percent of gross sales. The principal on Mr. Lubo's invested money was to be repaid by Mr. Carswell on a basis of 10 percent of his share of the profits. Mr. Lubo was to retain an interest in the profits of the firm until the loan was repaid, or at least for ten years.

Mr. Carswell also calculated his potential profits. His goal was to increase sales while at the same time earning a 10 percent rate of return on his prior capital investment in equipment and other assets. The present value of Mr. Carswell's investment was $250,000. Of this sum, machinery and equipment were valued at $100,000; real estate was worth $50,000 and his patent and know-how were valued at $100,000. On the basis of this evaluation, Mr. Carswell desired a return of $25,000 above salaries and other expenses after the first year of operation.

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