An investor is planning to open a new fast-food restaurant. He has a 5-year lease on a property that would require an investment estimated at $205,000 for redecorating and furnishing. He would use his own cash.

The present cost of capital (borrowed money) is 13%; use this percentage to determine the discount rate each of the 5 years.

Calculation of net cash flow from the restaurant for the 5 years of operation shows:

At the end of the lease, the furniture and equipment would have a cash value of $18,500. Should he make the investment? What IRR comes closest to giving him a complete return on his $205,000 investment?LO1

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Year Cash Flow 1 $37,500 2 43,800 3 46,300 4 50,000 5 60,000