Newby’s Restaurant is a restaurant venture being started by a friend of yours. S
ID: 2724791 • Letter: N
Question
Newby’s Restaurant is a restaurant venture being started by a friend of yours. She has developed a five year plan for the restaurant, which calls for it to pay a share of its profits to investors over the 5 years, and then the restaurant would be sold at the end of the five years, with the investors receiving a share of the selling price. Suppose the restaurant is expected to break even in year 1, then earn $100,000 per year for the following 4 years, and then be sold for $1,000,000 at the end of year 5.
Suppose you feel that a 20% return is appropriate for this investment. Given that, how much is this restaurant worth now?
If you were to invest $50,000 in Newby’s, what % of the restaurant would you expect to own?
Explanation / Answer
The restaurant earns a profit of 100000 from Y-2 to Y5 and then sold at 1000000 on Y-5. The rate of return expected is 20% =100000/(1.20^2)+100000/(1.20^3)+100000/(1.20^4)+100000/(1.20^5)+1000000/(1.20^5) 617605.45 My ownership percentage=(My investment/Value of the firm)*100=(50000/617605.5)*100 8.10