V4. In the past five years, Eagle Burger has grown to over 200 stores. Two of the company-operated units, Northside and Southside, are among the fastest-growing stores. Both are considering expanding their menus to include pizza. Installation of the necessary ovens and purchase of the necessary equipment would cost $180,000 per store. The current investment in the Northside store totals $890,000. Store revenues are $1,100,500 and expenses are $924,420. Expansion of Northside’s menu should increase profits by $30,600. The current investment in the Southside store totals $1,740,000. The store’s revenues are $1,760,800 and expenses are $1,496,680. Adding pizza to Southside’s menu should increase its profits by $30,600. 1) Assume Eagle Burger has a 14% required rate of return. From Eagle Burger’s perspective, is adding pizza to the menu at the Northside and Southside store desirable? That is, does adding pizza to the menu generate a greater return than 14%? 2) Suppose each store manager is compensated based on the ROI of its store (ROI = income ÷ assets). Does the manager of either the Northside or the Southside store add pizza to the menu? c) Now suppose each store manager is compensated based on residual income. Does the manager of either the Northside or the Southside store add pizza to the menu?
V4. In the past five years, Eagle Burger has grown to over 200 stores. Two of the company-operated units, Northside and Southside, are among the fastest-growing stores. Both are considering expanding their menus to include pizza. Installation of the necessary ovens and purchase of the necessary equipment would cost $180,000 per store. The current investment in the Northside store totals $890,000. Store revenues are $1,100,500 and expenses are $924,420. Expansion of Northside’s menu should increase profits by $30,600. The current investment in the Southside store totals $1,740,000. The store’s revenues are $1,760,800 and expenses are $1,496,680. Adding pizza to Southside’s menu should increase its profits by $30,600. 1) Assume Eagle Burger has a 14% required rate of return. From Eagle Burger’s perspective, is adding pizza to the menu at the Northside and Southside store desirable? That is, does adding pizza to the menu generate a greater return than 14%? 2) Suppose each store manager is compensated based on the ROI of its store (ROI = income ÷ assets). Does the manager of either the Northside or the Southside store add pizza to the menu? c) Now suppose each store manager is compensated based on residual income. Does the manager of either the Northside or the Southside store add pizza to the menu?
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 19P
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V4. In the past five years, Eagle Burger has grown to over 200 stores. Two of the company-operated units, Northside and Southside, are among the fastest-growing stores. Both are considering expanding their menus to include pizza. Installation of the necessary ovens and purchase of the necessary equipment would cost $180,000 per store.
The current investment in the Northside store totals $890,000. Store revenues are $1,100,500 and expenses are $924,420. Expansion of Northside’s menu should increase profits by $30,600.
The current investment in the Southside store totals $1,740,000. The store’s revenues are $1,760,800 and expenses are $1,496,680. Adding pizza to Southside’s menu should increase its profits by $30,600.
1) Assume Eagle Burger has a 14% required rate of return . From Eagle Burger’s perspective, is adding pizza to the menu at the Northside and Southside store desirable? That is, does adding pizza to the menu generate a greater return than 14%?
2) Suppose each store manager is compensated based on the ROI of its store (ROI = income ÷ assets). Does the manager of either the Northside or the Southside store add pizza to the menu?
c) Now suppose each store manager is compensated based on residual income. Does the manager of either the Northside or the Southside store add pizza to the menu?
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