Question

Carni Vore represents a meat sandwich restaurant chain that is expanding into a new, large metropolitan area. He currently has $2 million to invest and wants to open several restaurants. He found that each site will require a cash outlay of $230,000 for leasing, equipment, and initial inventory. Carni is currently looking at 20 sites. The first 15 sites have positive net present values; sites 16 through 20 have negative net present values. a. What is the maximum number of restaurants that Carni can establish for his company? Explain. b. How many restaurants can Carni open if his employer increases his budget to $5 million? Explain.

Answer 1

a) Carni can establish $2000,000/ 230,000 = 8.69

= 8 restaurants

This is because the total budget is $2 million. Each restaurant requires and initial investment of $230,000. Thus even though 15 restaurants are profitable due to budget limitations, he can only establish 8 restaurants.

b) If the budget = $5 million

Maximum number of restaurants that he can establish = 5000000/ 230000 = 21.74 or 21 restaurants.

However, since 15 are profitable, Carni will establish only 15 restaurants. It would not be economically viable to look at sites 16 to 20 even though the budget allows it since they have negative NPV and result in loss of value for the business.