Question

An entrepreneur wants is deciding between opening a restaurant in a small strip center or acquire and operate a food truck. The restaurant space can be rented for $2200 per month. Modest furnishings and used equipment will have a first cost of $26,000. Income is expected to be $14,500 per month, with expenses for utilities, labor, taxes, etc. expected to average $3700 per month. Alternatively, a kitchen-ready food truck will cost $17,600 to purchase and $900 per month to operate. Income is expected to be $8200 per month. If the salvage values are assumed to be 10% of the first cost for the restaurant and 35% of the first cost of the truck after a 5-year planning period, which alternative is better on the basis of an annual worth comparison at an interest rate of 12% per year, compounded monthly?

Answer 1

Calculation of Capital Recovery:
Restaurant Truck
a First Cost -26000 -17900
b Salvage Value 2600 6265
(26000*10%) (17900*35%)
c PVIF(1%, 60) 0.550449616 0.550449616
d Present Value of Salvage Value (b*c) 1431.169002 3448.566844
e Present Value of First cost and salvage value (a+d) -24568.831 -14451.43316
f PVAF (1%,60) 44.95503841 44.95503841
g Monthly Recovery -546.5200758 -321.4641488
Calculation of income
Restaurant Truck
a Income per month 14100 6200
b Operating Costs 5900 900
(2200+3700)
c Monthly income 8200 5300
Calculation of Annual Worth:
Restaurant Truck
a Cost Recovery -546.5200758 -321.4641488
b Income 8200 5300
c Worth (a+b) 7653.479924 4978.535851

Since the worth of the restaurant is higher than that of truck, it is proposed to open a restaurant.

*Worth of the alternatives has been calculated on monthly basis.