The owner of Adolla Bar and Restaurant is considering expanding the business. He is choosing between two alternatives: (1) build a new restaurant, or (2) buy and renovate an old building. The projected cash flows from these two alternatives are as follows: Build Buy and renovate Initial cash outflow (Year 0) 332,000 215,000 Cash inflows (Years 1 to 10) 46,000 39,500 Cash inflows (Years 11 to 20) 46,000 - The required rate of return is 9%. Ignore tax impacts. Required: Calculate the following for the projects: Payback period Accounting rate of return using (i) initial investment and (ii) average investment as the denominator Net present value Internal rate of return
The owner of Adolla Bar and Restaurant is considering expanding the business. He is choosing between two alternatives: (1) build a new restaurant, or (2) buy and renovate an old building. The projected cash flows from these two alternatives are as follows: Build Buy and renovate Initial cash outflow (Year 0) 332,000 215,000 Cash inflows (Years 1 to 10) 46,000 39,500 Cash inflows (Years 11 to 20) 46,000 - The required rate of return is 9%. Ignore tax impacts. Required: Calculate the following for the projects: Payback period Accounting rate of return using (i) initial investment and (ii) average investment as the denominator Net present value Internal rate of return
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
The owner of Adolla Bar and Restaurant is considering expanding the business. He is choosing between two alternatives: (1) build a new restaurant, or (2) buy and renovate an old building. The projected cash flows from these two alternatives are as follows:
|
Build |
Buy and renovate |
|
|
Initial |
332,000 |
215,000 |
|
|
46,000 |
39,500 |
|
Cash inflows (Years 11 to 20) |
46,000 |
- |
The required
Required:
Calculate the following for the projects:
- Payback period
- Accounting rate of return using (i) initial investment and (ii) average investment as the denominator
Net present value Internal rate of return
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