The finance manager of a fastfood restaurant is presented with an opportunity for opening a new 
location. The company has recently paid a consultant $50,000 for a demographic study about this 
new location. The results indicate this is a good opportunity. However, since it is close to another 
location, you expect that there will be a negative effect on the after-tax cash flows of that other location of 
$100,000 per year. 
The company would use land they purchased 3 years ago for $100,000. They estimate the current value is 
worth $125,000. They plan to spend an additional $500,000 on the plant and equipment to make their 
product. The equipment will have a five year useful life and have a salvage value of $0 at the end of the 
five year period. The company computes their depreciation on a straight-line basis. The company feels 
they will be able to sell their product as follows:
Year 1 Year 2 Year 3 Year 4 Year 5
40,000 60,000 80,000 90,000 100,000
Company estimates the average bill per meal will be $25 and the cost of their ingredients is 45% of the 
revenue. The company estimates the Selling, General, and Administrative expenses to run the store each 
year will be $600,000 per year. The total new working capital required for the store is 10 percent of next 
year's sales.
Assuming at the end of the five year period the company will need to shut down the location due to an 
expected change in zoning laws. The company estimates they will be able to sell the plant, land, and 
equipment for $200,000 at that time. The company has a 21% marginal tax rate and has a required rate of 
return of 15%. Calculate the NPV and IRR for the project.

Answer rating: 100% (QA)

To calculate the net present value NPV and internal rate of return IRR for the project we need to calculate the cash flows for each year and then disc... View the full answer