ABC Sdn Bhd is considering to open a new restaurant. It would cost RM1 million to open the restaurant (Year 0). The business is expected to last for about 4 years with no salvage value. The restaurant facilities would be depreciated over the 4 years on a straight line basis.

Net cash inflows from the investment in restaurant before deducting annual depreciation

charges, starting in Year 1, are estimated as follows:

Year 1	RM220,000
Year 2	RM350,000
Year 3	RM500,000
Year 4	RM650,000

The cost of capital for ABC Sdn Bhd is 20%.

(a)

Calculate the following:

(i) The payback period.

(ii) The accounting rate of return.

(iii) Internal rate of return (IRR)

(b)

The supplier advises ABC Sdn Bhd to open two restaurants simultaneously

In order to reduce the initial cost of investment. The total initial investment for two restaurants would be RM1.7 million, with the total annual cash inflows restaurants being doubled.

Calculate the new:

(i) Payback period.

(ii) Accounting rate of return.

(iii) Internal rate of return (IRR)

(c)

Suggest to the company whether to open one or two restaurants simultaneously. State

reasons for your answer.

Answer rating: 100% (QA)

a i The payback period is the time it takes for the initial ... View the full answer