Question

The owners of a chain of​ fast-food restaurants spend $30 million installing donut makers in all their restaurants. This is expected to increase cash flows by $8 million per year for the next five years. If the discount rate is 5.8​%, were the owners correct in making the decision to install donut​ makers?

Answer 1

• Working

Year	Annual cash flow increase	PVF of 5.8%	Present Value of Cash flows
	[A]	[B = 1/1.058Year]	[C = A x B]
1	$8,000,000	0.945179584	$7,561,437
2	$8,000,000	0.893364446	$7,146,916
3	$8,000,000	0.844389836	$6,755,119
4	$8,000,000	0.798100034	$6,384,800
5	$8,000,000	0.754347858	$6,034,783
Total present Value of increased cash flows			$33,883,054

• Present value of annual cash flows = $ 33,883,054
• Present value of cash outflow or Investment required = $ 30,000,000
• The present value of annual cash flows IS MORE THAN cost of investment, which makes the INVESTMENT profitable (because of positive Net present value).
• Hence, The owner is CORRECT to install donut makers.