Question: An investor is planning to open a new fast-food restaurant. He has a 5-year lease on a property that would require an investment estimated at $205,000 for redecorating and furnishing. He would use his own cash. The present cost of capital (borrowed money) is 13%; use this percentage to determine the discount rate each of the 5 years. Calculation of net cash flow from the restaurant for the 5 years of operation shows:
At the end of the lease, the furniture and equipment would have a cash value of $18,500. Should he make the investment? What IRR comes closest to giving him a complete return on his $205,000 investment?