Your brother, a new college graduate, wants to be his own boss. He wants to open a restaurant in a small strip center or acquire and operate a food truck, an increasingly popular mode of eating, es­pecially in larger cities. The restaurant space can be rented for $2200 per month. Modest furnishings and used equipment will have a first cost of $26,000. Income is expected to be $14,100 per month, with expenses for utilities, labor, taxes, etc. expected to average $3700 per month. Alterna­tively, a kitchen-ready food truck will cost $17,900 to purchase and $900 per month to operate. In­come is expected to be $6200 per month. If the salvage values are assumed to be 10% of the first cost for the restaurant and 35% of the first cost of the truck after a 5-year planning period, which

Question

al­ternative is better on the basis of an annual worth comparison at an interest rate of 12% per year, compounded monthly? Also, write the spreadsheet functions to find the AW values.

What will be an ideal response?

Answer 1

Factors:
AWResturant = -26,000(A/P,1%,60) -2200 -3700 + 14,100 + 26,000(0.10)(A/F,1%,60)
= -26,000(0.02224) - 2200 - 3700 + 14,100 + 2600(0.01224)
= $7653.58 per month

AWTruck = -17,900(A/P,1%,60) - 900 + 6200 + 17,900(0.35)(A/F,1%,60)
= -17,900(0.02224) - 900 + 6200 + 6265(0.01224)
= $4978.59 per month

Open the restaurant


Spreadsheet: Restaurant: = - PMT(1%,60,-26000,2600) + 8200 displays $+7653.48
Truck: = - PMT(1%,60,-17900,6265) + 5300 displays $+4978.54