ABC Sdn Bhd is considering to open a new restaurant. It would cost RM1 million to open
Question:
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.
Fundamentals Of Financial Management
ISBN: 9780273713630
13th Revised Edition
Authors: James Van Horne, John Wachowicz