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Bill Anders retires in 8 years. He has $650,000 to invest and is considering a franchise for a fast-food outlet. He would have to purchase equipment costing $500,000 to equip the outlet and invest an additional $150,000 for inventories and other working capital needs. Other outlets in the fast-food chain have an annual net cash inflow of about $160,000. Mr. Anders would close the outlet in 8 years. He estimates that the equipment could be sold at that time for about 10% of its original cost. Mr. Anders’ required rate of return is 16%. Required: Part a :What is the investment’s net present value when the discount rate is 16 percent? Part b: Refer to your calculations, is this an acceptable investment? Why or why not?(Ignore income taxes in this problem.)

Bill Anders retires in 8 years. He has $650,000 to invest and is
considering a franchise for a fast-food outlet. He would have to purchase
equipment costing $500,000 to equip the outlet and invest an additional
$150,000 for inventories and other working capital needs. Other outlets in the
fast-food chain have an annual net cash inflow of about $160,000. Mr. Anders
would close the outlet in 8 years. He estimates that the equipment could be
sold at that time for about 10% of its original cost. Mr. Anders’ required rate
of return is 16%.

 

Required:

 

Part a
:What is the investment’s net present value when the discount rate is 16
percent?

 

Part b: Refer to your
calculations, is this an acceptable investment?  Why or why not?(Ignore income taxes in
this problem.)

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