City View Restaurant

11-37

City View Restaurant is about to open at a new location. Operating plans indicate the following expected cash flows:

Initial investment now                                                $235,000                                         $ ------

End of year: 1                                                                $150,000                                        $200,000

                      2                                                                $200,000                                        $250,000

                      3                                                                $250,000                                        $300,000

                      4                                                               $300,000                                         $450,000

1.       Compute the NPV for all these cash flows. This should be a single amount. Use a discount rate of 14%.

2.       Suppose the minimum desired rate was 12%. Without further calculations, determine whether the NPV is positive or negative Explain.