Steve and Linda Hom live in Bartlesville, Oklahoma. Two years ago, they visited

Question

Steve and Linda Hom live in Bartlesville, Oklahoma. Two years ago, they visited Thailand. Linda, a professional chef, was impressed with the cooking methods and the spices used in the Thai food. Bartlesville does not have a Thai restaurant, and the Homs are contemplating opening one. Linda would supervise the cooking, and Steve would leave his current job to be the maitre d'. The restaurant would serve dinner Tuesday-Saturday. Steve has noticed a restaurant for lease. The restaurant has seven tables, each of which can seat four. Tables can be moved together for a large party. Linda is planning two seatings per evening, and the restaurant will be open 50 weeks per year. T

he Homs have drawn up the following estimates;

Average revenue, including beverages and dessert........$45 per meal

Average cost of food...........................................$15 per meal

Chef's and dishwasher's salaries...............................$61,200 per year

Rent (premises, equipment)...................................$4,000 per month

Cleaning (linen and premises).................................$800 per month

Replacement of dishes, cutlery, glasses......................$300 per month

Utilities, advertising, telephone..............................$2,300 per month

Identify THREE (3) major factors the Joneses should consider before they make their decision as to whether to open the restaurant or not.

Explanation / Answer

Joneses should consider demand for the thai food first. As it will be first restaurant in area finding demand for Thai food can be quite tricky. If demand is low business will be unprofitable.

Next as steve will leave his job this will be an opportunity cost. Opportunity cost means as steve will pursue restaurant business he will have to give up his current earnings and possible future growth in earnings. Restaurant business must genearte earnings more than his current salary.

Third will be the cost of raising funds to run business and NPV(Net present value) of investment. NPV is nothing but how much suplus business will generate if it starts running. From future earnings, expenses are subtracted then those will be discounted by cost of raising funds to get present value of furtue cash flows. Finally initial investment will be subtracted from present value of furtue cash flows to get NPV. If NPV is positive restaurant should be opened.

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