The owners of a chain of fast-food restaurants spend $ 25 million installing donut makers in all their restaurants. This is expected to increase cash flows by $ 10 million per year for the next five years. If the discount rate is 6 %, were the owners correct in making the decision to install donut makers?

Question

Rowe

Business

4 August, 02:06

The owners of a chain of fast-food restaurants spend $ 25 million installing donut makers in all their restaurants. This is expected to increase cash flows by $ 10 million per year for the next five years. If the discount rate is 6 %, were the owners correct in making the decision to install donut makers?

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Answers (1)

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Anya Barron · Answer 1

yes as it net present value is $24.17 million

Explanation:

In this question we have to find out the net present value which is shown below

(In millions) (In millions)

Year Cash flows Discount rate 6% PV of cash inflows

0 - $25 1 - $25 (A)

1 $10 0.9434 $9.43

2 $10 0.8900 $8.90

3 $10 0.8396 $8.40

4 $10 0.7921 $7.92

5 $10 0.7473 $7.47

6 $10 0.7050 $7.05

Present value $49.17 (B)

Net present value $24.17 (A - B)

As we can see that the net present value comes in positive which means it generated the return in near future so the decision should be yes