Question

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 $192.000. If you were to invest that amount in a restaurant elsewhere in town, you could expect a 16% ROI (8 Required: 2-1. Would you be willing to pay more than $192,000 for the restaurant near the campus? Yes No a-2. What is the maximum price you would be willing to pay for the business? (Do not round intermediate calculations.) Maximum Price b. If you purchased the restaurant near the campus for $216,000 and the fair value of the assets you acquired was $192 000, identify the account along with its balance, that is used to record the additional amount paid over the fair value of the assets

Answer 1

Fast Food Restaurants Requirement 1 Yes because of the above average ROI of 18%, I could afford to invest $24000 more than $192000 and still earn 16% ROI which is the rate I would expect to earn from an investment in this type of business. The excess earnings offered by this investment = (192000 x 18% ) - (192000 x 16% ) = 34560 - 30720 = 3840 per year on a $192000 investment.At an ROI of 16% an investment of $216000 would be required to earn 34560 of income, so $216000 is the maximum price I would be willing to pay for the business Requirement 2 Each of the individual assets acquired would be recorded at their fair market value and the $24000 would be recorded as "Goodwill" Crow Co. Requirement a Punch Press - 14000 / 14000 + 7000 + 3060 ) = 14000 / 24060 = 58.19% Lathe = 7000 / 24060 = 29.09% Welder = 3060 / 24060 = 12.72% 17000 + 1300 = 18300 Punch Press = 18300 x 58.19% = 10648.77 Lathe = 18300 x 29.09% = 5323.47 Welder = 18300 x 12.72% = 2327.76 18300 Requirement b The useful life of the asset to Crow Co.