3.0 A Family Friend is interested in starting their own restaurant business and
ID: 2384532 • Letter: 3
Question
3.0 A Family Friend is interested in starting their own restaurant business and heard you could help them make effective economic decisions. They have 3 choices : The parameters around their business are: Assume interest/borrowing rate of 6% per year. Assume the business will be analyzed for a 5 year life and a 15 year life because they just don't know if it will make it. Do not consider Tax or Depreciation Impact - Determine the net present worth of each option at 5 and 15 years At a 6% interest, how many years does it take to break even between Option 1 and Option 3? Option 1 Leasing Lease Space $14,000 per year Payable at end of period + Increases by $500 per year Lease Equipment $5,000 per year Payable at end of period, increases 2% per year Option 2 Lease/buy Lease Space $14,000 per year Payable at end of period+ Increases by $500 per year Buy Equipment $22,000 Total Payable at beginning (Time Zero) Option 3 Buy Everything Buy and Rennovate Space $80,000 Total Payable at beginning (Time Zero) Buy Equpment $22,000 Total Payable at beginning (Time Zero) 3.0 A Family Friend is interested in starting their own restaurant business and heard you could help them make effective economic decisions. They have 3 choices : The parameters around their business are: Assume interest/borrowing rate of 6% per year. Assume the business will be analyzed for a 5 year life and a 15 year life because they just don't know if it will make it. Do not consider Tax or Depreciation Impact - Determine the net present worth of each option at 5 and 15 years At a 6% interest, how many years does it take to break even between Option 1 and Option 3? Option 1 Leasing Lease Space $14,000 per year Payable at end of period + Increases by $500 per year Lease Equipment $5,000 per year Payable at end of period, increases 2% per year Option 2 Lease/buy Lease Space $14,000 per year Payable at end of period+ Increases by $500 per year Buy Equipment $22,000 Total Payable at beginning (Time Zero) Option 3 Buy Everything Buy and Rennovate Space $80,000 Total Payable at beginning (Time Zero) Buy Equpment $22,000 Total Payable at beginning (Time Zero)Explanation / Answer
option 1 5years
Lease space and equipment
Space
Equipment
total outflow
Discounted Cash flow
Discounted cash flow
1
14000
5000
19000
0.9434
17925
2
14500
5100
19600
0.8900
17444
3
15000
5202
20202
0.8396
16962
4
15500
5306.04
20806.04
0.7921
16480
5
16000
5412.161
21412.16
0.7473
16000
NPV At 15 years
84811
Option 1 15 years
Lease space and equipment
Space
Equipment
total outflow
Discounted Cash flow
Discounted cash flow
1
14000
5000
19000
0.9434
17925
2
14500
5100
19600
0.8900
17444
3
15000
5202
20202
0.8396
16962
4
15500
5306
20806
0.7921
16480
5
16000
5412
21412
0.7473
16000
6
16500
5520
22020
0.7050
15524
7
17000
5631
22631
0.6651
15051
8
17500
5743
23243
0.6274
14583
9
18000
5858
23858
0.5919
14122
10
18500
5975
24475
0.5584
13667
11
19000
6095
25095
0.5268
13220
12
19500
6217
25717
0.4970
12780
13
20000
6341
26341
0.4688
12350
14
20500
6468
26968
0.4423
11928
15
21000
6597
27597
0.4173
11515
NPV at 15 years
219551
Option 2
year
Space
Equipment
total outflow
Discounted Cash flow
Discounted cash flow
0
-22000
-22000
1
-22000
1
14000
14000
0.9434
13208
2
14500
14500
0.8900
12905
3
15000
15000
0.8396
12594
4
15500
15500
0.7921
12277
5
16000
16000
0.7473
11956
NPV at 5 years
40940
year
Space
Equipment
total outflow
Discounted Cash flow
Discounted cash flow
0
-22000
-22000
1
-22000
1
14000
14000
0.9434
13208
2
14500
14500
0.8900
12905
3
15000
15000
0.8396
12594
4
15500
15500
0.7921
12277
5
16000
16000
0.7473
11956
6
16500
16500
0.7050
11632
7
17000
17000
0.6651
11306
8
17500
17500
0.6274
10980
9
18000
18000
0.5919
10654
10
18500
18500
0.5584
10330
11
19000
19000
0.5268
10009
12
19500
19500
0.4970
9691
13
20000
20000
0.4688
9377
14
20500
20500
0.4423
9067
15
21000
21000
0.4173
8763
NPV 15 years
142749
Option 3
Option3
Renovate Space
Buy Equipment
Total
NPV
80000
22000
102000
Break even year
Lease space and equipment
Discounted cash flow
Cumulative cash
0
-102000
-102000
1
17925
-84075
2
17444
-66632
3
16962
-49670
4
16480
-33189
5
16000
-17189
6
15524
-1665
7
15051
13385
8
14583
27969
9
14122
42090
10
13667
55757
11
13220
68977
12
12780
81758
13
12350
94107
14
11928
106035
15
11515
117551
6+(1665/15050)=6.11 years
option 1 5years
Lease space and equipment
Space
Equipment
total outflow
Discounted Cash flow
Discounted cash flow
1
14000
5000
19000
0.9434
17925
2
14500
5100
19600
0.8900
17444
3
15000
5202
20202
0.8396
16962
4
15500
5306.04
20806.04
0.7921
16480
5
16000
5412.161
21412.16
0.7473
16000
NPV At 15 years
84811
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