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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%?

Part B: Refer to your calculations. Is this an acceptable investment? Why or why not?

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M941818

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