Question

A well-known Mexican restaurant plans to open a new branch by the end of next year. The new restaurant will require an initial investment of $300,000 and an annual operating cost of $31,000. It will have a $62,000 salvage value after 6 years. The company also estimates that the new restaurant will bring in revenue of $43,400 each year. Determine the acceptability of the investment if the company's minimum attractive rate of return is 13% per year using annual worth analysis

Answer 1

Initial investment (P) = $300,000

Net annual revenue (A) = 43,400 - 31,000 = $12,400

Salvage value (F) = 62,000

n = 6 years

i = 13%

AW = -P(A/P, i, n) + A + F(A/F, i, n)

      = -300,000(A/P, 13%, 6) + 12,400 + 62,000(A/F, 13%, 6)

      = -300,000(0.2502) + 12,400 + 62,000(0.1202)

      = -75,060 + 12,400 + 7,452.4

       = -$55,207.6

Since the annual worth of the investment is negative, the investment is not financially feasible. Thus, the investment is not accepted.