The owners of a chain of fast-food restaurants spend $25 million installing donu

Question

The owners of a chain of fast-food restaurants spend $25 million installing donut makers in all their restaurants. This is expected to increase cash flows by $10 million per year for the next five years. If the discount rate is 5.2%, were the owners correct in making the decision to install donut makers? EXPLAIN

A) No, as it has a net present value (NPV) of $2 million.

B)Yes, as it has a net present value (NPV) of $11 million.

C) No, as it has a net present value (NPV) of $4 million.

D) Yes, as it has a net present value (NPV) of $18 million.

Explanation / Answer

Calculation of the Net Present Value NPV = Present Value of Cash Inflows- Cash Outflows 10/(1.052)^1+10/(1.052)^2……….10/(1.052)^5-25 From the annuity table 10*4.30-25 43-25 NPV = $18 The correct answer is D) Yes, as it has a net present value (NPV) of $18 million

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