Reference no: EM132401387

Question -

Miner's Mexican Grill Inc. plans to open its 100th restaurant by the end of next year. The new restaurant will require an initial investment of $300,000 and an annual operating cost of $31,000. It will be liquidated after 12 years. The company also estimates that the new restaurant will bring in revenue of $91,000 each year. The company's minimum attractive rate of return is 20%.

a. Calculate the (simple) payback period.

b. Use the present worth (NPV) method to determine whether the new restaurant investment should be made.

Calculate the rate of return of the 3-year project described below using the ERR method, assuming an 8% reinvestment rate. Use the calculated rate of return of the project to determine whether the project should be accepted, assuming investors' opportunity cost of capital is 15%.

The project requires an $800,000 initial investment and brings in net cash flows equal to $400,000 in year 1, $500,000 in year 2, and $600,000 in year 3. In addition, there is a $100,000 salvage value at the end of year 3.

Assuming repeatability, determine which of the two machines, A or B, should be acquired, based on the objective of minimizing cost. The relevant cost of capital is 8%.

Machine A requires an initial outlay of $200,000, has an annual operating cost of $30,000, and lasts 7 years. Machine B requires an initial outlay of $150,000, has an annual operating cost of $25,000, and lasts 5 years.