3. Dumble Mr Dumble owns a large but very run-down castle, Doors Castle, and is thinking of running a themed restaurant in the banqueting hall at the weekends. He has given you the following information: He will need to buy numerous fixtures and fittings costing £200,000, payable immediately. These will be eligible for capital allowances on an 18% reducing balance basis, with a balancing allowance or charge on disposal. He expects 5,000 diners a year and intends to charge £40 per head in the first year of operating the restaurant, increasing at 5% pa. Food will cost £8 per head in the first year of operating the restaurant and prices will increase at 3% pa. Staff will consist of 2 cooks at £5,000 each, 3 waiters at £3,000 each and 1 entertainer at £4,000. These are all wages for the first year of operation and are expected to increase at 2% pa. Other running costs incurred during the operation of the restaurant are estimated at a constant £47,000 pa. Dumble has a nominal cost of capital of 15% and general inflation is expected to be 4% pa. The business would pay tax at 20%. The restaurant will be open for 4 years and the fittings will then be sold for £50,000. Calculate the net present value of the proposal, working to the nearest £1,000, and comment.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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3. Dumble

Mr Dumble owns a large but very run-down castle, Doors Castle, and is thinking of running a themed restaurant in the banqueting hall at the weekends. He has given you the following information:

He will need to buy numerous fixtures and fittings costing £200,000, payable immediately. These will be eligible for capital allowances on an 18% reducing balance basis, with a balancing allowance or charge on disposal.
He expects 5,000 diners a year and intends to charge £40 per head in the first year of operating the restaurant, increasing at 5% pa.
Food will cost £8 per head in the first year of operating the restaurant and prices will increase at 3% pa.
Staff will consist of 2 cooks at £5,000 each, 3 waiters at £3,000 each and 1 entertainer at £4,000. These are all wages for the first year of operation and are expected to increase at 2% pa.
Other running costs incurred during the operation of the restaurant are estimated at a constant £47,000 pa.
Dumble has a nominal cost of capital of 15% and general inflation is expected to be 4% pa. The business would pay tax at 20%.
The restaurant will be open for 4 years and the fittings will then be sold for £50,000.

Calculate the net present value of the proposal, working to the nearest £1,000, and comment.

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