Question

In 2013, Ed intends to invest $1,500,000 in a bowling alley. After two years of operation, he plans to invest an extra $450,000 in the business by opening a restaurant. In 10 years, Ed anticipates selling the business for $3 million. Ed’s cost of capital will be 11%. Ed would like to earn at least a 20% internal rate of return. Ed can also lease a bowling alley that is located in a different city. The yearly cash flow from operations is estimated at $200,000 (net after the lease payment) for the next 10 years. Ed would also like to make 20% on this investment.

1. Is purchasing the bowling alley and restaurant a good investment? To answer this question, calculate the following:
• The net present value by using the cost of capital
• The internal rate of return
Ed predicts that the business will generate the following cash flows:


2. Is leasing the bowling alley a good decision?
3. If Ed can only do one or the other, should he purchase or lease?Why?


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  • CreatedDecember 03, 2014
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