Coog's Food Truck is considering opening a brick-and-mortar fast-food restaurant location. The owners want to calculate the NPV for the first 5 years. First, the cost of building the restaurant will be $2.5 million due today. Second, the yearly FCF will be $1.2 million.

Since this is a private company, you do know their cost of equity. You know that McDonald's, a leader in the same industry, has a cost of equity of 13%, a cost of debt of 4%, and a D/E ratio of 1. McDonald's is a stable firm and plans to maintain a constant D/E ratio.

Finally, you know that Coog's Food Truck's owners want to issue debt to help finance the project. Specifically, they will borrow $2 million from the bank. They will keep this loan for the first 5 years. Their cost of borrowing and interest rate will be 5%. The firm's tax rate is 22%.

Given the information above, what is the NPV of this new brick-and-mortar establishment?

Answer rating: 100% (QA)

To calculate the NPV we need to determine the cash flows for each year calculate the present value o... View the full answer