CHAPTER 9 HOSP ITAL ITY INDUSTRY APPL ICAT IONS OF T IME VALUE, page 284:

Based on Paris's market analysis, tour of the competition, inspection of the subject property, and interviews with the prior owner, she concludes a Star Restaurant would work in the subject space, but it would require approximately $200,000 of renovation and conversion cost in addition to the land purchase price of $2,000,000. By Year 5, the restaurant could generate $2.5 million in annual food revenue and $1.5 million in annual beverage revenue. Ms. Brown estimates the following cash flows for the first five years of operations, with cash flows leveling off in Year 5.

Year Cash Flow

1 $695,000

2 876,250

3 1,057,500

4 1,238,750

5 1,420,000

1. Calculate the IRR and NPV of this project utilizing a 12% discount rate and a 15% cap rate. Ms. Brown was able to secure a loan for $1,540,000, and an equity investor agreed to invest the remaining $660,000 in exchange for 20% ownership in the project.

2. What is the loan-to-value ratio for this project?

3. What would the investor's ROI be for this 5-year project if the restaurant achieved its budgeted operating results for the year?

4. If the investor has a hurdle rate of 15%, does this project meet or exceed the investor's requirements?