is considering investing in a franchise in a fast-food chain. He would have to purchase equipment costing $420,000 to equip the outlet and invest an additional $30,000 for inventories and other working capital needs. Other outlets in the fast-food chain have an annual net cash inflow of about $120,000. Mr. Anders would close the outlet in 5 years. He estimates that the equipment could be sold at that time for about 10% of its original cost and the working capital would be released for use elsewhere. Mr. Anders’ required rate of return is 8%. (Ignore income taxes)

FINANCIAL ACCOUNTING
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Chapter1: Financial Statements And Business Decisions
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Bill Anders is considering investing in a franchise in a fast-food chain. He would have to purchase equipment costing $420,000 to equip the outlet and invest an additional $30,000 for inventories and other working capital needs. Other outlets in the fast-food chain have an annual net cash inflow of about $120,000. Mr. Anders would close the outlet in 5 years. He estimates that the equipment could be sold at that time for about 10% of its original cost and the working capital would be released for use elsewhere. Mr. Anders’ required rate of return is 8%. (Ignore income taxes)

What is the investment's net present value? Is this an acceptable investment?

 

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