Nance’s Restaurant, a local independent restaurant, is evaluating new point-of-sale (POS) systems and must determine if a new installation is feasible. A new POS installation would include both software and hardware, with a total cost of $20,000. Nance’s Restaurant is currently operating without a point-of-sale system and utilizes a chit system with carbon copy papers that allow the waitstaff to provide a copy to the kitchen and the customer while retaining a copy for accounting purposes. Management is aware that this is an archaic system and that a POS system will create efficiencies, but they are not sure it is worth the cost. Through analysis, management has determined that a POS system would allow the waitstaff to turn tables quicker, therefore increasing the number of guests serviced and the sales volume. Another advantage of the POS system is that it provides reports to management, allowing them to better analyze their business. Taking all of these factors into consideration, Nance’s management forecasts incremental increases in profit over the next three years of $8,000, $9,000, and $10,000. 1. Determine the payback period, present value, and net present value of this project for the three-year period, utilizing an 8% discount rate. 2. Management has received an offer from another POS vendor with installation costs of $25,000. The second vendor is offering increased functionality in the form of additional cost control reports, which would allow the restaurant to realize an additional $500 in incremental profits per year for a total of $8,500, $9,500, and $10,500. Financially, does this option fit Nance’s Restaurant’s criteria? Please explain your answer.

 

The Star Restaurant Company owns and operates Chinese restaurants throughout the northwestern United States. Paris Brown, vice president of development, has been analyzing a new metropolitan market for expansion opportunities. The company’s best option would be to acquire a distressed property at a low price and turn it into a money-making venture. Ms. Brown is contemplating taking over a restaurant that recently failed and is currently closed. The restaurant is located in the parking lot of a large regional shopping mall. The mall owner is anxious to reopen the restaurant, as in its current state it is an eyesore and a deterrent to attracting retail customers. Ms. Brown asks the previous owner for historical operating results for the failed restaurant, and she is provided with the following information: Based on Paris’s market analysis, tour of the competition, inspection of the subject property, and interviews with the prior owner, she concludes a Star Restaurant would work in the subject space, but it would require approximately $200,000 of renovation and conversion cost in addition to the land purchase price of $2,000,000. By Year 5, the restaurant could generate $2.5 million in annual food revenue and $1.5 million in annual beverage revenue. Ms. Brown estimates the following cash flows for the first five years of operations, with cash flows leveling off in Year 5. 1. Calculate the IRR and NPV of this project utilizing a 12% discount rate and a 15% cap rate. Ms. Brown was able to secure a loan for $1,540,000, and an equity investor agreed to invest the remaining $660,000 in exchange for 20% ownership in the project. 2. What is the loan-to-value ratio for this project? 3. What would the investor’s ROI be for this 5-year project if the restaurant achieved its budgeted operating results for the year? 4. If the investor has a hurdle rate of 15%, does this project meet or exceed the investor’s requirements?