Farmville Regional Airport is modernizing its terminal facilities in anticipation of significant growth in the number of
Question:
The consultant's study reported the following information concerning expected revenue and costs for the new restaurant:
Average revenue per customer: ......... $ 9
Average variable cost per customer: ..... $ 5
Customers per day in year 1: ........ 500
Number of employees years 1 and 2: ..... 4
Number of employees years 3 and 4: ..... 5
Average annual employee salary: ........ $20,000
Fixed annual cash operating costs: ...... $70,000
Future customer demand for the new restaurant will increase by 10% each year for the next four years. The current cold food outlet has an average contribution margin of $2.50 per customer. If the new hot food restaurant is not opened, it is expected that the cold food outlet will sell to 1,200 customers per day in year 1, with the number of customers increasing by 10% per year in the subsequent three years.
If the new hot food restaurant is opened, the consultant's report predicts the number of customers served at the cold food outlet will be 40% lower than without the restaurant in year 1. Thereafter, the number of customers would increase by 10% per year.
The airport operates 360 days per year, and the airport board uses an 8% discount rate to evaluate projects of this type.
Required
a. Calculate the annual contribution margin generated by the proposed hot food restaurant.
b. Calculate the annual impact that the proposed hot food restaurant will have on the contribution margin generated by the existing cold food outlet.
c. Calculate the net present value of opening the proposed hot food restaurant.
d. Should the airport board move forward with its plan to open the hot food restaurant? Why or why not?
Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes... Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
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