Answer to Question #279314 in Financial Math for Radhika

Question

Valentina’s Pizzas Corporation is considering the purchase of a new restaurant for $8 million. The forecasted net cash flows (net of the costs associated with running the restaurant) are $3 million a year for the next 15 years. A major refurbishment costing $2 million will be required after both the fifth and tenth years. After 15 years, the restaurant will be closed and the restaurant’s venue is expected to be sold for $16 million. If the discount rate is 8%, what is this investment’s NPV?

Answer 1

Data given:

Initial cost = $ 8 million

Net cash flow (for 15 years) = $ 3 million

Major refurbishment cost after 5th and 10th years (i.e., 6th and 11th year)= $ 2 million

Life of restaurant = 15 years

Salvage value = $ 16 million

Discount rate = 8%

Investment's NPV = $ 20,604,198.37

Formula used::