Two people have come to yourrestaurant with different offers.Sam"I'll sell you abrand...Two people have...

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Accounting

Two people have come to yourrestaurant with different offers.
Sam "I'll sell you abrand new soft-serve ice cream machine. It'll cost $4,000 andshould provide you with an extra $1,000 of revenue every year.You'll only have to pay about $100/year to maintain it, and itshould last for nine years.
Ella "I run a partyvenue just down the street from your restaurant. I'll charge you$10,000 to put signage up in the venue, and you can become mypreferred caterer for weddings, bar mitzvahs, etc. I bet I can getyou $50,000 of additional revenue every year, and I know yourcontribution margin is around 10%. Let's say this arrangement willlast for five years."
Your required rate of return is 7%.
1 What's the payback period for each of theseoffers?
2 What's the NPV of each of these offers?
3 What's the approximate IRR of each of theseoffers?

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Present Value PV of Cash Flow Cash Flow1iN iDiscount RateRequired return7 007 NYear of Cash Flow ALTERNATIVE 1 SAM YEAR WISE CAH FLOWS AND PRESENT VALUE OF CASH FLOWS Annual cash inflow1000100 900 N Year 0 1 2 3 4 5 6 7 8 9 ALTERNATIVE 1 SAM InitialCash Flow 4000 B Annual cash inflow See Answer

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Transcribed Image Text

In: AccountingTwo people have come to yourrestaurant with different offers.Sam"I'll sell you abrand...Two people have come to yourrestaurant with different offers.Sam"I'll sell you abrand new soft-serve ice cream machine. It'll cost $4,000 andshould provide you with an extra $1,000 of revenue every year.You'll only have to pay about $100/year to maintain it, and itshould last for nine years.Ella"I run a partyvenue just down the street from your restaurant. I'll charge you$10,000 to put signage up in the venue, and you can become mypreferred caterer for weddings, bar mitzvahs, etc. I bet I can getyou $50,000 of additional revenue every year, and I know yourcontribution margin is around 10%. Let's say this arrangement willlast for five years."Your required rate of return is 7%.1What's the payback period for each of theseoffers?2What's the NPV of each of these offers?3What's the approximate IRR of each of theseoffers?

	Two people have come to yourrestaurant with different offers.

Sam	"I'll sell you abrand new soft-serve ice cream machine. It'll cost $4,000 andshould provide you with an extra $1,000 of revenue every year.You'll only have to pay about $100/year to maintain it, and itshould last for nine years.




Ella	"I run a partyvenue just down the street from your restaurant. I'll charge you$10,000 to put signage up in the venue, and you can become mypreferred caterer for weddings, bar mitzvahs, etc. I bet I can getyou $50,000 of additional revenue every year, and I know yourcontribution margin is around 10%. Let's say this arrangement willlast for five years."







	Your required rate of return is 7%.

1	What's the payback period for each of theseoffers?
2	What's the NPV of each of these offers?
3	What's the approximate IRR of each of theseoffers?