Reference no: EM132797210

In the past ten years Six Guys Burgers has expanded with more than 50 stores throughout New York City..Two of the company-operated units in Manhattan, East Side and West Side, are among the fastest growing stores. Both are considering expanding their menus to include pizza. Purchase and installation of the necessary equipment costs $180,000 per location. The current investment in the East Side store totals $920,000. Store revenues are $1,100,500 and expenses are $924,420. Expansion of the East Side's menu should increase profits by $30,600. The current investment in the West Side store totals $1,840,000. The store's revenues $1,760,800 and expenses are $1,496,680. Adding pizza to West Side's menu should increase its profits by $30,600.

• The Five Guys central management evaluates its managers based on return on investment. Managers of individual stores have decision rights over pizza expansion.

Problem 1: Calculate the return on investment for both stores A. before pizza is added, B. for the pizza project only, and C. for the stores after expansion.'

Problem 2: Assuming 14 percent cost of capital , calculate residual income for both stores before and after the potential expansion.

Problem 3: Will the Five Guys choose to expand?