Question

Charlie prepares a business plan around the purchase of a small restaurant for $350,000. Each year, he estimates revenues will be $102,000 and expenses will be $80,000. After 6 years, Charlie plans to sell the restaurant for $400,000.
a. Draw the cash flow diagram.   (½ point)
b. What is the internal rate of return of Charlie’s business plan?   (1 point)

Answer 1

(a) Cash flow diagram as follows (all values in $)

(b)

In years 1-5, Net cash flow ($) = Revenue - Expense = 102,000 - 80,000 = 22,000

In year 6, Net cash flow ($) = Revenue + Sale value - Expense = 102,000 + 400,000 - 80,000 = 422,000

Internal rate of return (IRR) is computed using Excel IRR function as follows.

Year	Net Cash Flow ($)
0	-3,50,000
1	22,000
2	22,000
3	22,000
4	22,000
5	22,000
6	4,22,000
IRR =	8.22%