After a trip to Bordeaux France you are considering opening a restaura

After a trip to Bordeaux France you are considering opening a restaurant based on Restaurant L’Entrecote. You will offer a fixed menu of salad, steak and French fries.

Your innovation is that you will use a bordelaise (red wine) sauce instead of a tarragon butter sauce. You plan to run the restaurant for two years and then retire. Start-up costs, to be incurred immediately, are $500,000. Start-up costs include kitchen equipment, kitchen supplies, renovations, furniture, fixtures, and the point-of-sales system. Assume that all of those assets are classified as 5-year property. The assets can be sold for $150,000 after two years.
You expect 100 diners per night. The restaurant will be open for 300 nights per year. The average diner orders food with a menu price of $35 and beverages with a menu price of $15. Food costs are 34% of the menu price and beverage costs are 50% of the menu price.
The nightly wages are $2,160 (for the chef, 5 kitchen staff, a bartender, the Maitre d’ and 10 wait staff). Municipal tax, rent, and utilities, are $41,400 per annum.
Assume that all revenues and operating expenses are received (paid) at the end of each year.
The small business tax rate is 20%. The cost of capital is 10%.
When the restaurant opens you will have to invest in an inventory of wine, beer and liquor costing $50,000. What is the NPV for the proposed acquisition if the cost of capital is 12%?

MACRS Depreciation Rates
Year 3-Year 5-Year
1 33.33% 20.00%
2 44.45% 32.00%

A) $102,880
B) $(9,586 )
C) $(7,812 )
D) $432,880
E) $128,600

ANSWER

C