Assume That A National Restaurant Firm Called BBQ Builds 15

Assume That A National Restaurant Firm Called Bbq Builds 15 New Restau

Assume that a national restaurant firm called BBQ builds 15 new restaurants at a cost of $1 million per restaurant. It outfits each restaurant with an additional $400,000 of equipment and furnishings. To help partially defray the cost of this expansion, BBQ issues and sells 300,000 shares of stock at $40 per share. What is the amount of economic investment that has resulted from BBQ’s actions? How much purely financial investment took place?

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Understanding the scope of investment in business expansion involves distinguishing between economic investment and purely financial investment. In the case of BBQ's expansion, the calculations provide insight into the actual resources committed to the development of new restaurant outlets versus the financial mechanisms employed to fund these endeavors.

Economic investment refers to the actual expenditure of resources—capital, labor, materials—used in producing new productive assets within a business. In the given scenario, BBQ is undertaking tangible investments by constructing and outfitting new restaurants, which involve real costs in terms of physical resources and capital deployment. Specifically, the company incurs expenses to build each new restaurant, which costs $1 million each, and outfits each with additional equipment and furnishings costing $400,000. The total direct costs for constructing and outfitting 15 restaurants can be calculated as follows:

  • Cost per restaurant: $1,000,000
  • Number of restaurants: 15
  • Cost for building 15 restaurants: 15 × $1,000,000 = $15,000,000
  • Furnishings and equipment per restaurant: $400,000
  • Total furnishings and equipment for 15 restaurants: 15 × $400,000 = $6,000,000

Adding both components gives the total economic investment:

Total Economic Investment = Cost of construction + Cost of furnishings and equipment = $15,000,000 + $6,000,000 = $21,000,000

This figure reflects the actual resource expenditure by BBQ in expanding its operational capacity—standing as the true measure of economic investment.

Purely financial investment, on the other hand, pertains to the funding method used by the company, specifically through the issuance of shares to raise capital. BBQ sells 300,000 shares at $40 per share, which constitutes the financial investment raised via equity markets. The total amount of financial capital generated through this public offering is calculated as:

Financial Investment = Number of shares issued × Price per share = 300,000 × $40 = $12,000,000

This amount represents the capital obtained from investors, which may or may not have been directly invested into tangible assets immediately, but is available to finance operations or expansion efforts.

In summary, BBQ’s economic investment—the actual resource expenditure—is approximately $21 million, reflecting the tangible costs of constructing and outfitting the new restaurants. In comparison, the purely financial investment, or the capital raised through equity issuance, amounts to $12 million. The disparity between these figures highlights the difference between the physical resources committed to expansion and the financial capital raised to finance such activities, including potential costs not directly tied to immediate resource deployment, such as administrative expenses or debt servicing.

Understanding these distinctions is vital in assessing a company's growth strategy, financial health, and the real economic impact of its expansion activities. It also underscores the importance of leveraging financial markets efficiently to mobilize capital, which can then be transformed into physical assets that contribute to the company's productive capacity.

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