Question

Foodelicious Corp. is evaluating whether it should take over the lease of an ethnic restaurant in Manhattan. The current owner had originally signed a 25-year lease, of which 16 years still remain. The restaurant has been growing steadily at a 7 percent growth for the last several years. Foodelicious Corp. expects the restaurant to continue to grow at the same rate for the remaining lease term. Last year, the restaurant brought in net cash flows of $310,000. If the firm evaluates similar investments using a15 percent discount rate, what is the present value of this investment? (Round to the nearest dollar.)

A) $2,966,350
B) $2,838,182
C) $3,109,460
D) $2,709,124

Answer 1

The present value of the investment is $2,966,350.

Step-by-step explanation:

In order to calculate the present value of the investment, we need to discount the future cash flows to their present value. The net cash flows are expected to grow at a rate of 7 percent for the remaining 16 years of the lease. Using the formula for present value of a growing perpetuity, we can calculate the present value of the future cash flows. The formula is:

PV = C / (r - g)

Where PV is the present value, C is the cash flow in the first year, r is the discount rate, and g is the growth rate. In this case, C is $310,000, r is 15 percent, and g is 7 percent. Plugging in these values:

PV = 310,000 / (0.15 - 0.07) = $2,966,350

Therefore, the present value of the investment is $2,966,350.