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 at 15 percent, what is the present value of this investment? (Round to the nearest dollar.)

Question

Quizplus · Accepted Answer

To calculate the present value of the investment, we need to use the formula for the present value of an annuity: PV = C * [(1 - (1 + r)^-n) / r], where PV is the present value, C is the annual cash flow, r is the discount rate (15% in this case), and n is the number of periods (16 in this case). Plugging in the numbers, we get: PV = $310,000 * [(1 - (1 + 0.15)^-16) / 0.15] = $2,838,182 (rounded to the nearest dollar). Therefore, the best choice is B.