You own a restaurant and are considering buying a liquor license. You estimate that it will costyou $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 iscapitalized 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.a.(There is no salvage value at the end of the 5 year).b.Assume now that the bar will bring in additional customers to your restaurant. If yourafter- tax operating margin is 60%, how much additional revenue would you have togenerate cach year in your restaurant for the liquor license to make economic sense?

Answered: You own a restaurant and are…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 4P

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