Question

The owners of a chain of​ fast-food restaurants spend $ 25 million installing donut makers in all their restaurants. This is expected to increase cash flows by $ 10 million per year for the next five years. If the discount rate is 6​%, were the owners correct in making the decision to install donut​ makers?

Answer 1

Answer:

yes as it net present value is $24.17 million

Explanation:

In this question we have to find out the net present value which is shown below

              (In millions)                                            (In millions)

Year Cash flows Discount rate 6% PV of cash inflows  

0            -$25                     1                          -$25  (A)

1              $10                  0.9434                   $9.43

2              $10                   0.8900                   $8.90

3               $10                   0.8396                   $8.40

4              $10                   0.7921                   $7.92

5             $10                    0.7473                   $7.47

6             $10                    0.7050                    $7.05

Present value                                       $49.17   (B)

Net present value                              $24.17  (A - B)

As we can see that the net present value comes in positive which means it generated the return in near future so the decision should be yes