Problem 5 (20pts) A generally-successful restaurant chain is hoping to expand to

Question

Problem 5 (20pts) A generally-successful restaurant chain is hoping to expand to a new location, and has hired an economist to estimate the potential revenues and expenses for this new area. The economist states that the cost of initial construction is estimated to be approximately $4,600,000. Based on the local population, annual revenues are expected to be $600,000, with annual expenses of $180,000. The restaurant chain uses a MARR of 7%, and has a long-term plan of being in business for at least 25 years, but the sensitivity of the local markets has the restaurant owners nervous. a) Using the PW analysis, is this a profitable venture for the restaurant chain'? b) How much would the revenues need to increase/decrease (as a percentage) to change the profitability of this venture? c) How much would the initial construction costs need to increase/decrease (as a percentage) to change the profitability of this venture?

Explanation / Answer

it is profitable to start this venture because the future value is high as follows:

Initial construction cost = $4,600,000

A nual revenue = $ 600,000

Annual exps = 180,000

MAAR 7% for 25 years

Conversions:

present value or worth (PV)= 4600000= 4600000

interest rate (i)= 0.07= 0.07

number of years (n)= 25= 25

Solution:

future value (F)= $ 24,966,190.

Increase of profitability % = 600,000 / 180,000 = 3 %

Increase / decrease in initial investment = 4,600,000 / 600,000 = 7.6%

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