Question

The owners of a chain of​ fast-food restaurants spend $25 million installing donut makers in all their restaurants. This is expected to increase cash flows by $11 million per year for the next five years. If the discount rate is 6.9​%, were the owners correct in making the decision to install donut​ makers?

Answer 1

Ans. Cash flows in year,

Year 0 = -initial investment = -$25 million

Year 1 to 5 = increased cashflow = $11 million

Net present worth of the above cashflow at 6.9% interest rate,

NPW = -25 million + 11 million/(1+0.069) + 11 million/(1+0.069)^2 + 11 million/(1+0.069)^3 + 11 million/(1+0.069)^4 + 11 million/(1+0.069)^5

=> NPW = $20223191.67 or 20.22319167 million

As the net present worth of the investment is positive, so, the owners were correct in making this decision