Assume That A National Restaurant Firm Called BBQ Builds Ten

Assume That A National Restaurant Firm Called Bbq Builds 10 New Res

Assume that a national restaurant firm called BBQ builds 10 new restaurants at a cost of $1 million per restaurant. It outfits each restaurant with an additional $200,000 of equipment and furnishings. To help partially defray the cost of this expansion, BBQ issues and sells 200,000 shares of stock at $30 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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The expansion of BBQ, a national restaurant firm, by constructing 10 new restaurants, represents a significant economic investment. To analyze the total economic and financial investment involved, it is crucial to understand the nuances of both concepts. Economic investment encompasses all expenditures that add to the productive capacity of the economy, including physical capital such as buildings and equipment. In contrast, financial investment relates specifically to the purchase of financial assets, like stocks and bonds, which do not directly increase physical capital but represent claims on existing assets.

Firstly, the direct costs of constructing and outfitting the new restaurants constitute the tangible physical investment. Each restaurant's construction costs $1 million, and outfitting with equipment and furnishings costs an additional $200,000 per restaurant. Therefore, the total physical investment in the new restaurants can be calculated as follows:

- Cost of building restaurants: 10 restaurants * $1,000,000 = $10,000,000

- Cost of outfitting restaurants: 10 restaurants * $200,000 = $2,000,000

Adding these together:

Total physical investment = $10,000,000 + $2,000,000 = $12,000,000

This figure reflects the actual expenditure on physical capital—new restaurants and their associated equipment.

Next, considering the financial aspect, BBQ issues and sells 200,000 shares of stock at $30 per share. The total capital raised through equity issuance is:

- 200,000 shares * $30 = $6,000,000

This amount provides financial resources that BBQ can allocate toward its expansion efforts. However, it is important to distinguish between financial investment and economic investment here. The proceeds from the stock issuance do not directly correspond to physical capital creation; rather, they are financial resources that may be used to finance the physical investments.

The concept of economic investment is often associated with net additions to capital stock. Since BBQ's physical investment exceeds the amount raised from issuing stock (which is $6 million), the shortfall must be financed through internal funds, debt, or other sources. Nevertheless, the total physical capital added to the economy as a result of BBQ’s expansion remains at $12 million.

To sum up:

- Economic investment: The total added physical capital directly resulting from BBQ’s expansion is $12 million, representing the total spent on constructing and outfitting the new restaurants.

- Purely financial investment: The amount of funds raised through stock sale is $6 million. This is strictly a financial investment, as it involves issuing shares and acquiring financial claims rather than directly creating new physical assets.

In conclusion, while BBQ raised $6 million through stock issuance (financial investment), the total physical or economic investment in expanding its capacity through new restaurants and equipment amounts to $12 million. The discrepancy indicates that the remaining $6 million of investment may be financed through other means, emphasizing the distinction between financial flows and physical capital formation.

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