Tex-Mex, Inc., is a rapidly growing chain of Mexican food restaurants. The company has a limited amount
Question:
Tex-Mex, Inc., is a rapidly growing chain of Mexican food restaurants. The company has a limited amount of capital for expansion and must carefully weigh available alternatives. Currently, the company is considering opening restaurants in Santa Fe or Albuquerque, New Mexico. Projections for the two potential outlets are as follows:
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Each restaurant would require a capital expenditure of $1.4 million, plus land acquisition costs of $1million for Albuquerque and $2 million for Santa Fe. The company uses the 5 percent yield on risk-free U.S. Treasury bills to calculate the risk-free annual opportunity cost of investment capital.
A. Calculate the expected value, standard deviation, and coefficient of variation for each outlet’s profit contribution.
B. Calculate the minimum certainty equivalent adjustment factor for each restaurant’s cash flows that would justify investment in each outlet.
C. Assuming that the management of Tex-Mex is risk averse and uses the certainty equivalent method in decision making, which is the more attractive outlet?Why?
Opportunity CostOpportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...
Step by Step Answer:
A Albuquerque E A 10000005 20000005 150000 Santa Fe B To justi...View the full answer
