You have been asked by an investor to value a restaurant. For the current year, the restaurant earned pretax operating income of $750,000. Income has grown 2% annually during the last five years, and it is expected to continue growing at that rate into the foreseeable future. The annual change in working capital is $60,000, and current year capital spending on long-lived assets exceeded depreciation by $75,000. Both working capital and the excess of capital spending over depreciation are projected to grow at the same rate as operating income. By introducing modern management methods, you believe the pretax operating income growth rate can be increased to 3% beyond the second year and sustained at that rate into the foreseeable future. The ten-year Treasury bond rate is 2.5%, the equity risk premium is 5.5%, and the marginal federal, state, and local tax rate is 35%. The beta and debt-to-equity ratio for publicly traded firms in the restaurant industry are 2 and 1.0, respectively. The business's target debt-to-equity ratio is 0.67, and its pretax cost of borrowing, based on its recent borrowing activities, is 9%. The liquidity risk premium is believed to be 15%, relatively low for firms of this type due to the excellent reputation of the restaurant. Since the current chef and the staff are expected to remain after the business is sold, the quality of the restaurant is expected to be maintained. The investor is willing to pay a 10% premium to reflect the value of control.

a. What is the restaurants enterprise free cash flow in year 1

b. What is the maximum amount the investor should be willing to pay to buy the restaurant?