An entrepreneur wants is deciding between opening a restaurant in a small strip
ID: 2793653 • Letter: A
Question
An entrepreneur wants is deciding between opening a restaurant in a small strip center or acquire and operate a food truck. The restaurant space can be rented for $2200 per month. Modest furnishings and used equipment will have a first cost of $26,000. Income is expected to be $14,100 per month, with expenses for utilities, labor, taxes, etc. expected to average $3700 per month. Alternatively, a kitchen-ready food truck will cost $17,900 to purchase and $900 per month to operate. Income is expected to be $6200 per month. If the salvage values are assumed to be 10% of the first cost for the restaurant and 35% of the first cost of the truck after a 5-year planning period, which alternative is better on the basis of an annual worth comparison at an interest rate of 12% per year, compounded monthly?
Explanation / Answer
Since the worth of the restaurant is higher than that of truck, it is proposed to open a restaurant.
*Worth of the alternatives has been calculated on monthly basis.
Calculation of Capital Recovery: Restaurant Truck a First Cost -26000 -17900 b Salvage Value 2600 6265 (26000*10%) (17900*35%) c PVIF(1%, 60) 0.550449616 0.550449616 d Present Value of Salvage Value (b*c) 1431.169002 3448.566844 e Present Value of First cost and salvage value (a+d) -24568.831 -14451.43316 f PVAF (1%,60) 44.95503841 44.95503841 g Monthly Recovery -546.5200758 -321.4641488 Calculation of income Restaurant Truck a Income per month 14100 6200 b Operating Costs 5900 900 (2200+3700) c Monthly income 8200 5300 Calculation of Annual Worth: Restaurant Truck a Cost Recovery -546.5200758 -321.4641488 b Income 8200 5300 c Worth (a+b) 7653.479924 4978.535851