2) You are CFO of a very profitable hotel. You are considering a new investment project: opening a restaurant.

The project would require an initial investment of 8.5 million in fixed assets, and it is forecasted that an additional 2 million will need to be invested in year 3. Resale value of all these fixed assets (at the end of period 4) is 4 million, and it is estimated that in periods 5 and 6 this figure will go down by 20% and 50% respectively. Fixed assets are fully depreciated linearly in 5 years (i.e. assume the resale value does not affect depreciation). Profits in the sale of fixed assets will be taxed at the same rate as regular profits (35%).You can find below the (uncertain) forecasts for sales and production costs. Accounts receivable will represent 20% of total sales whereas accounts payable will be 15% of COGS. No stock will be necessary.The project beta -high, since it's a "nouveau cuisine" project- is 2.5. The riskless rate is 5%. The market has been asking for a 15% return on the company (which has a beta of 2).If the restaurant project is approved, it is expected to be a temporary project (we expect "cuisine" trends to be quite volatile after 6 years), so we are considering the possibility of abandoning the project at the end of years 4, 5 or 6.

Is this an attractive project? When should we abandon it and sell off the fixed assets?

Forecasts for the restaurant project Period 3 2 4 Sales (thousands of units) Unit price COGS (thousands of euros) Other costs (thousands of euros 43.5 830.0900.0 945.0 700.0 100.0 35 522 11,454 14,040 15,876 12,600 2,100 315 20 23 26 28 30 4,000 78 1,718 2,106 2,381 1,890