You've finally decided you've had enough of the zoom classes - too boring - no more! After going through hell known as Chuck E cheese for your nephews birthday party, you've decided to take the plunge and open a fun restaurant for kids! You will name it "Pennywise's fun food house restaurant" next door to Mr. Taco across the street from CSUSM. Now you got from family and friends some capital but you also need to stay above water and you have to pay them (your friends and family) back by the end of 4 years (at 12% p.a). After doing some late night guesstimates, you figure that it will cost you $165000 to start up with rent, deposits, equipment, salaries, pizza dough, balloons, arcade games, etc, for the first year but you expect to make gross revenue of $56357.14, $56441.33, and $64,828.94 in the following 3 years and net income of $13620, $3300 and $29100 in those 3 years. Should you do it (question 1)?

Fortunately, you've been awake for the FIN 302 class last weekend decide to look at it from FIN 302 perspective and use the tools (and relevant formulas) you learned their. you recall they were 5 tools.... describe each other tools or rules (question 2), apply to this situation (question 3), describe the pros and cons of each tool (question 5), when they may be good and when they may be unreliable (question 5).

Finally, out of the blue, the friendly neighborhood bank says he can give you a loan for up to $165,000 at an interest rate of 12% as long as you pay it back in 4 years. should you do it (question 6)? how much to borrow or better to not borrow at all (question 7)?

Here are the tools in reference

MAIN "GO TO" TOOLS . Internal rate of return = Discount rate that makes NPV = 0 Accept if IRR > required return Same decision as NPV with conventional cash flows Unreliable with: Non-conventional cash flows Mutually exclusive projects Net present value = Difference between market value (PV of inflows) and cost Accept if NPV > 0 No serious flaws Preferred decision criterion Profitability Index = Benefit-cost ratio Accept investment if PI > 1 Cannot be used to rank mutually exclusive projects May be used to rank projects in the presence of capital rationing "SORTA OK" TOOLS Payback period = Average Accounting Return= Length of time until Initial investment is recovered Average net income/Average Accept if payback Some specified Doesn't account for time value of target money Ignores cash flows after payback Needed data usually readily Arbitrary cutoff period available Asks the wrong question Not a true rate of return Time value of money ignored Arbitrary benchmark Based on accounting data not cash flows MAIN "GO TO" TOOLS . Internal rate of return = Discount rate that makes NPV = 0 Accept if IRR > required return Same decision as NPV with conventional cash flows Unreliable with: Non-conventional cash flows Mutually exclusive projects Net present value = Difference between market value (PV of inflows) and cost Accept if NPV > 0 No serious flaws Preferred decision criterion Profitability Index = Benefit-cost ratio Accept investment if PI > 1 Cannot be used to rank mutually exclusive projects May be used to rank projects in the presence of capital rationing "SORTA OK" TOOLS Payback period = Average Accounting Return= Length of time until Initial investment is recovered Average net income/Average Accept if payback Some specified Doesn't account for time value of target money Ignores cash flows after payback Needed data usually readily Arbitrary cutoff period available Asks the wrong question Not a true rate of return Time value of money ignored Arbitrary benchmark Based on accounting data not cash flows