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 in after-tax cash flows each year for the next five years. (The cost of the license is capitalized and the cash flows already reflect the depreciation). If your cost of capital is 15%, estimate the net present value of buying a liquor license. (There is no salvage value at the end of the 5™ year). a. Assume now that the bar will bring in additional customers to your restaurant. If your after- tax operating margin is 60%, how much additional revenue would you have to generate cach year in your restaurant for the liquor license to make economic sense? b.
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 in after-tax cash flows each year for the next five years. (The cost of the license is capitalized and the cash flows already reflect the depreciation). If your cost of capital is 15%, estimate the net present value of buying a liquor license. (There is no salvage value at the end of the 5™ year). a. Assume now that the bar will bring in additional customers to your restaurant. If your after- tax operating margin is 60%, how much additional revenue would you have to generate cach year in your restaurant for the liquor license to make economic sense? b.
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 4P
Related questions
Question
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 6 steps with 4 images
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning