Donald is the Owner of a Small Restaurant Case Study - Management Assignment Help

Assignment Task:

Task:

Question 1:
Donald is the owner of a small restaurant, and is considering renovating his kitchen and buying new equipment to keep up with increasing business. He has received a quote of $40,000 from the contractor John for this renovation and equipment. After some additional research and negotiation, Donald has noted/secured the following:

? John has agreed to let Donald pay the $40,000 cost of the renovation as 10 equal fortnightly payments (i.e. 10 payments of $4000), the first being made immediately.
? The final repayment will coincide with the completion of the renovation. Donald can reopen his restaurant immediately after this.
? Donald's bank account pays interest at 5.4% p.a. compounding semi-annually.
For the purposes of this question, assume he can both invest and borrow at this rate.
(a) How many weeks are there from today until the renovation is complete? (1 mark)
Question 2:
B. Determine the equivalent effective annual rate for Donald’s account (1mark)
Question 3:
C. Determine the equivalent effective fortnightly rate for Donald’s account. (1mark)
Question 4:
Donald decides to call up his bank to renegotiate the interest rate. After discussing his situation, the bank has agreed to lend money to Donald for this renovation at an effective fortnightly rate of 0.1425%. Using this new interest rate, determine the following:
d) As noted earlier, the $40,000 cost of the renovation can be spread out as 10 equal fortnightly payments, the first being made immediately. Using the new interest rate, determine the present value of these 10 repayments. (1 mark)

Question 5:
E. Hence determine the benefit (in present value terms) Donald gains by spreading out his repayment over 10 installments. (1mark)

Question 6: Multiple choice Question
F. Would the benefit calculated in part (e) be larger or smaller if Donald had stuck with the higher interest rate from before the renegotiation? Why? (1mark)
a. Larger benefit, since a higher interest rate would lead to a lower present value of the repayments.
b. Larger benefit, since a higher interest rate would result in a larger future value.
c. Smaller benefit, since a higher interest rate would lead to a lower present value of the repayments.
d. Smaller benefit, since a higher interest rate would result in larger repayments in the future.

Question 7:
Today, the renovation of Donald's restaurant has been completed. Donald calculates that the renovation and other related expenses total $48,000 on the completion date (i.e. today). He believes that the renovation will bring in additional profit for his restaurant. Donald plans to sell his restaurant after 6 years. He would like to see an effective annual return of 29.5% on his investment (i.e. the renovation).

a) What is the minimum additional level weekly profit (paid at the end of each week) that would need to be generated over the next 6 years for Donald to achieve his return of 29.5%? For the purposes of this part only, assume there are no other additional profits resulting from the renovation. (1 mark)

Question 8:
B. After further consideration, Donald believes that the renovation would also allow him to sell his restaurant for an additional $60,000 in 6 years’ time. What is the new minimum additional level weekly profit that would need to be generated over the next 6 years for Donald to achieve his return of 29.5%? (1 mark)

Question 9:
Six years have passed, and Donald is now considering selling his restaurant. Judy and Sarah are two different investors, both interested in purchasing the restaurant.
a) Judy plans to purchase and continue operating the restaurant. She calculates that in addition to the purchase price, she would have to pay:
? $15,000 today in fees and taxes for the transaction, and
? $20,000 for renovations, paid one month from today.
These renovations will finish one month from today, when the restaurant is expected to be ready to open. Once the restaurant opens, it is expected to generate a recurring income of $35,000 per month indefinitely, receivable at the end of each month. Explicitly, the first payment is exactly 2 months from the purchase date.
Which of the following is an equation that, when solved, would give the effective monthly rate Judy earns on her investment? (1 mark)

A. (Purchase Price) +15,000 + = 20,000 1 + i 35,000 i (1 + i)

B. (Purchase Price) +15,000 + 20,000 = 35,000 i

C. (Purchase Price) +(15,000 + 20,000)(1 +i)− 1 = = (1 + ) 35,000 i i

D. (Purchase Price) +15,000 + 20,000 = (1 - 35,000 i (1 + i ) − n)

Question 10:
b) Sarah, on the other hand, plans to run the restaurant as-is for one year, and then sell it after 2 years. She has projected the following cash flows:
? The purchase price is $1.36 million,
? Paying $15,000 today in fees and taxes for the transaction,
? The restaurant is expected to generate $40133.186537259 at the end of each month for the following 2 years.
? Sarah expects to sell the restaurant after 2 years for $1.51 million. Determine the effective monthly rate that Sarah would be earning on this investment (1mark)

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