The Owners of a Chain of Fast-Food Restaurants Spend $28

question 57

Multiple Choice

The owners of a chain of fast-food restaurants spend $28 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 6.5%,were the owners correct in making the decision to install donut makers?

• A)No,as it has a net present value (NPV)of -$2.25 million.
• B)No,as it has a net present value (NPV)of-1.68 million.
• C)Yes,as it has a net present value (NPV)of $8.74 million.
• D)Yes,as it has a net present value (NPV)of $13.56 million.

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Definitions:

Owner's Equity

The residual interest in the assets of a business after deducting liabilities; represents the owner's claim on the business assets.

Liabilities

Financial obligations a company owes to outside parties.

Assets

Resources owned or controlled by a business, which are expected to produce future economic benefits.

Accounting Equation

The fundamental principle of accounting that states Assets = Liabilities + Equity, which must always be in balance for accurate financial reporting.