Question: . What is the estimated Internal Rate of Return (IRR) of the project? Should the project be accepted based on the IRR criterion? Why?
Question: . What is the estimated
accepted based on the IRR criterion? Why?
You have determined in your mind that you would like to have a business of your own, although your
father runs a family restaurant in your local city. You have therefore, decided to have a medium
size snack and cocktails bar which will accommodate the cruise ship passengers who visit your city.
You plan to keep the business for five years after which you will sell it off to your brother John
for $2,000,000 and go off to do your Master’s Degree in the UK. Though you will be occupying the
establishment from your grandmother for free, you have decided that you need to make some
improvements to the property which will cost you $1,500,000. Additionally, you will spend $275,000
in bar stools, tables and decorations. If this space had been leased out, it would have fetched a
lease rental of $75,000 per year. You will
determined that you would need an average cash balance of $15,000 and inventory of $20,000 while
Accounts payable should average $10,000. You plan to borrow the money from a local bank and pay
interest at a rate of 15 percent. To increase your chances of success at the business you plan to
have your cousin Johnathan to conduct a market survey which will cost you $100,000. Your new
venture will decrease the revenue your family business will earn by $15,000 per year and you have
agreed to allow your father to take this amount from your allowance as a shareholder of the family
restaurant.
Revenues are projected to be $500,000 the first year and is expected to increase by 20% the second
year, 15% the third year and to continue to increase at 10% thereafter. Fixed annual operating
costs are expected to be salaries of $110,000, Utilities $75,000, Food and Liquor License is 15% of
gross revenues and taxes are 40% of net
revenues.
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