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You want to open Louie’s place, a restaurant in Quebec City.   You plan to run the...

  1. You want to open Louie’s place, a restaurant in Quebec City.   You plan to run the restaurant for two years and then retire. Start-up costs (kitchen equipment and supplies, renovations, furniture, fixtures, and the point-of-sales system), to be incurred immediately, are $500,000. Assume that all of the assets are in Class 8 and depreciated at 20%. The assets can be sold for $360,000 after two years. The restaurant will be open for 300 nights per year and you expect 100 diners per night who each purchase $50 worth of food and beverages. You forecast operating cash flows of 12.86% of sales in Year 1 and 13.39% of sales in Year 2. Assume that all revenues and operating expenses are received (paid) at the end of each year. The small business tax rate is 20%. When the restaurant opens you will have to invest in an inventory of wine, beer and liquor costing $80,000.

What is the NPV for the proposed acquisition if the cost of capital is 10%? Provide a clear concluding statement that summarizes your result.

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jeff jeffy answered 1 year ago
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