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Question B1 Following recent trends towards healthy eating, Joe has decided to open a vegan restaurant in his home town. He is considering two different
Question B1 Following recent trends towards healthy eating, Joe has decided to open a vegan restaurant in his home town. He is considering two different options which he would like your help in evaluating. Option One Joe can purchase a 5-year lease for 80,000. This lease will have no value at the end of the 5 year period. The cost to fit out the restaurant will be 30,000. After the five years, Joe expects the fittings and fixtures to have a scrap value of 2,000. He has estimated the future cash flows from the restaurant to be Year 1 Year 2 Year 3 Year 4 Year 5 35,000 45,000 60,000 65,000 55,000 Option Two Joe has been approached by a local entrepreneur, Angela, who is very interested in the restaurant idea. She has suggested that Joe purchase the lease, as planned for 80,000. However, she has said that she will fit out the restaurant at her own expense, run the restaurant herself and pay Joe 40,000 per annum as "rent". Joe would want a return of 12% on any investment made. Joe is now unsure whether to run the restaurant himself or whether to sub-lease the restaurant to Angela. Requirement: a) Evaluate the above options for Joe using Payback, Accounting Rate of Return (ARR) and Net Present Value (NPV) capital investment appraisal techniques and purely on the basis of your calculations, advise Joe on which option you think he should choose. Note: you will need to calculate depreciation in order to calculate profit for ARR. b) Discuss any other factors that Joe should consider before making his decision
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