Question
You own a restaurant and are considering buying a liquor license. You estimate that it will cost you $ 200,000 to buy a five-year license
You own a restaurant and are considering buying a liquor license. You estimate that it will cost you $ 200,000 to buy a five-year license and construct a bar, and that you will generate $ 40,000 operating revenue each year for the next five years. The cost of the license is capitalized and the upfront cost is depreciation straight line over 5 years with no salvage value. Networking Capital will increase $10,000 as soon as the project starts and will be recouped at the end of 5 years.
a. If your cost of equity is 11%, cost of debt is 7% and the company had 80% equity and 20%debt, estimate the net present value of buying a liquor license. (There is no salvage value at the end of the 5th year). Tax rate is 30%.
b. What is NPV? Explain IRR? What is payback period?
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