Answered step by step
Verified Expert Solution
Question
1 Approved Answer
4. James is thinking of starting a restaurant. He has S200,000 to invest in his restaurant. He has two choices. Open a small restaurant without
4. James is thinking of starting a restaurant. He has S200,000 to invest in his restaurant. He has two choices. Open a small restaurant without any other investors, i.e. he would own 100% of it or open a larger restaurant and own only 75% of the restaurant. The S200,000 to open the restaurant is all paid up front in year 0 If demand is good, James believes the small restaurant would generate profits of $25,000 in year 1, $40,000 in year 2, $65,000 in years 3 and 4 In year 5 he believes he can sell the restaurant for $300,000. Show the equation needed to calculate the Net Present Value of his investment in the small restaurant if demand is good. You do not need to calculate NPV, just set up the equation. Use an interest rate-12.0%. 3 pts. If demand is good the NPV of opening the restaurant in part a. is $112,011.63. If demand is lackluster the NPV of the restaurant will only be S30 ,000. If there is a 40% demand is good and a 60% demand is lackluster calculate the Expected Net Present Value of opening the small restaurant. 3 pts. If James decides to open the larger restaurant, he finds that if demand is good, the NPV of the profits is S180,000. If demand is lackluster, the NPV is only $30,000. Again, if there is a 40% chance demand is good and a 60% chance that demand is lackluster, calculate James, Expected Net Present Value (i.e. only the NPV of what James receives) of opening the large restaurant. 3 pts. a. b. c. d. Based on your answers in b. and c., which restaurant should James open? 3 pts
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started