The Country Crock Restaurant is considering opening a new restaurant location. You have gathered the following information about this opportunity.

The organization owns some land that is suitable for this purpose with a book value of $1 million. Recent appraisals put the value of this land at $1.5 million.

The cost to build the restaurant will be $2.5 million which includes the building, equipment and all furniture and fixtures. The company will depreciate these assets over a 5 year life to 0 salvage value using the straight line method. The company estimates that it will be able to sell the fixed assets, including the land, for $2 million at the end of 5 years.  

The company spent $100,000 on a feasibility study which indicated that average daily store traffic of 1000 people can be expected and they will spend on average $10 per person. The restaurant will be open 360 days per year. The variable cost will be 40% of this amount. It is expected that only 75% of the gross profit will be incremental, as there are other Country Crock Restaurants along the Interstate 75 corridor and some patrons will just stop at this location instead. The fixed cost to run this restaurant will be $400,000 per year.

Working capital needs are as follows: Inventory $135,000 and Accounts Payable $20,000. These will remain at this level over the life of the project and be fully recovered at the end of the project.

The Tax Rate is 30%.

Required Return 18%.

Should Country Crock pursue this opportunity? 

Support your answer with NPV and IRR analysis.

Answer rating: 100% (QA)

Calculations Investment Land 15 million Building equipment 25 million Working capital 135000 Total ... View the full answer