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Fast Food Restaurant with above average return on assets

Fast Food Restaurants

Assume that fast-food restaurants generally provide an ROI of 16%, but that such a restaurant near a college campus has an ROI of 18% because its relatively large volume of business generates an above-average turnover (sales/assets). The replacement value of the restaurant's plant and equipment is $206,000. If you were to invest that amount in a restaurant elsewhere in town, you could expect a 16% ROI.

1. Would you be willing to pay more than $206,000 for the restaurant near the campus? No or Yes.

2. a. What is the maximum price willing to pay for the business?

2. b. If you purchased the restaurant near the campus for $231,750 and the fair value of the assets you acquired was $206,000, identify the account used to record this amount, along with its balance.

Solution Preview

See the attached file.
1. Would you be willing to pay more than $206,000 for the restaurant near the campus? No or Yes.

Yes, if the competing returns were all 16%, you would pay more for the above-average return-generating store because it would still offer a competitive return on the investment.

2a. What is the maximum price willing to pay for the ...

Solution Summary

The solution includes a discussion of the reasoning and computations to illustrate how this is done.

$2.19