In the fast-food and fast-casual restaurant industry, breakfast serves as a high-margin, low-effort contributor to total earnings. For fast food giant McDonalds Corporation(ticker: MCD), the inclusion of the all-day breakfast menu boosted sales and accounted for 1/3 of all pre-pandemic sales (Marketplace).

To reduce the reliance on external delivery services, you are evaluating a proposal that McDonalds establish its own delivery service with specially outfitted vehicles. To ensure a consistent product and customer experience, these vehicles would be equipped to handle items whose quality deteriorates over time.

As of 11/5/2020, McDonalds total capital has a market value of $406,760,386,000 and 88.31% is common stock equity. McDonalds has an equity beta of 0.58 and a cost of debt of 3.2%. McDonalds does not have any preferred stock outstanding. The annual expected return on the market is 11.8% and the 5-year Treasury note has a yield of 0.40%.

The proposed project will generate the following cash flows:

Time CF (in $M)

0 -240.00

1 105.68

2. 84.09

3. 77.39

4. 66.19

5. 43.60

MUST SHOW FORMULAS AND CALCULATIONS

Questions:

1. What is the dollar amount of debt, preferred stock, and common stock held by the firm? 2. Assuming a corporate tax rate of 21%, what is MCDs weighted average cost of capital (WACC)? 3. Calculate each of the following and indicate whether the project is acceptable:

1. (a) Calculate the payback period (assume a maximum allowable payback period of 3 years)

2. (b) Calculate the discounted payback period (assume a maximum allowable payback period of 3 years)

3. (c) Calculate the net present value (NPV)

4. (d) Calculate the profitability index (PI)

5. (e) Calculate the project economic value added (EVA) (assume straight-line depreciation for the initial investment capital)

6. (f) Calculate the internal rate of return (IRR)

4. Based on your analysis, what is your overall recommendation?

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