ACE 345 Fall 2020

Homework #7

100 pts.

Due Wednesday November 4^th at 12 pm (noon)

Submit the Excel file with your solutions to the assignment link on Compass

You currently own and operate a bar in Champaign called the Illini Tap (the bar from the financial statement section of the course). Up until now you have only served beer and hard alcohol to your customers (no food), and all liquor served has been purchased through a distributor. Business has been good, but you have just bought and moved into a new building and are looking to further expand the bars business.

The new building you are now located in has more space than the bars previous location and the basement of the new building is currently unfinished. You have come up with two different investment possibilities:

Investment Alternative 1: Microbrewery

Renovate the basement into a microbrewery and begin brewing your own beer for sale at the bar.

Investment Alternative 2: Kitchen

Renovate the basement into a kitchen and begin to serve a full menu of food at the bar.

Information:

You have estimated that both projects will require an initial investment of $100,000 for renovations and new equipment purchases. You have found a local bank that will lend 60% of the initial investment, financed over 5 years at 6% per year. You can assume that the entire initial investment will be depreciated using the straight-line method over a 10-year period.

You expect both investments to generate additional revenues of $50,000 and additional expenses of $32,000 in the first year. Both the revenues and expenses directly related to the new investments are expected to grow at a rate of 2% each year.

Effects on other sales:

If you decide to go with the microbrewery and start selling your own beer, you expect sales of other beverages to decline by $3,000 in the first year. This loss in sales is expected to grow at a rate of 1% each year.

If you decide on the kitchen investment and start serving food, you expect beverage sales to increase by $3,000 in the first year. This gain in beverage sales is expected to grow at a rate of 1% each year.

Other information you might need:

Illini Tap Financial Information
D/A	0.60
Interest rate on debt (rdebt)	6%
Required rate of return on equity (requity)	30%
Marginal Tax Rate	25%

Using the above information, answer the following questions and perform the analysis outlined below.

1. What is the Illini Taps weighted-average-cost-of-capital (WACC)? (10 pts.)

2. Calculate the NATCF series, and find the NPV of each investment using the WACC as the discount rate. (50 pts.)

3. Find the IRR of each investment. (10 pts.)

4. Find the MIRR of each investment using the WACC as the discount rate. (20 pts.)

Question 2, 3, and 4 Microbrewery Kitchen Other Cash Effects NATCF (microbrew) Year Inflows Outflows Depreciation Loan Payment Loan Interest Taxable Income Taxes Year Inflows NATCF (kitchen) Outflows Other Cash Effects Depreciation Loan Payment Loan Interest Taxable income Taxes 0 1 2 3 4 0 1 2 3 4. 5 6 7 8 9 10 5 6 7 8 9 10 Year NATCF PV Factor PV PV outflows FV Factor FV inflows Year NATCF PV Factor PV PV outflows FV Factor FV inflows 0 1 2 3 0 1 2 3 4 5 6 7 8 9 10 6 7 8 9 10 NPV NPV IN IRR IRR MIRR MIRR