Joe is considering expanding his pizza shop empire. For the startup costs joe expects that he will need to spend $500,000 on pizza making equipment. This equipment will have a CCA Rate of 25%. Joe expects to be in business for 15 years at which time the equipment will have a value of only $50,000. In addition, Joe expects he will need $100,000 of initial working capital, and thereafter working capital will be 30% of Sales. All working capital will be recovered at the end of 15 years.

There will be two sizes of Pizza; Large and The Gut Buster. Initial unit sales of Large will be 3000 pies, and unit sales of the Gut Buster are expected to be 6000 pies. The initial sales price for the Large will be $12, while for the Gut Buster $20. Unit sales are expected to grow 5% each year for the first 10 years and then remain at a constant level starting at year 11. Each Large Pizza costs $4 to make, while each Gut Buster costs $6.

With each Large pizza sold, Joe expects to sell 1 beverage, while for each Gut Buster he will sell 2 beverages. The first year, each beverage will sell for $2.50, and will have a cost to Joe of $0.75. Fixed costs are expected to be $100,000 per year and will grow with inflation. All prices and costs are expected to increase with inflation which is forecast to be 2%. The tax rate is 25% and the appropriate discount rate is 12%.

Determine what the payback period, the Internal Rate of Return and what the Net Present Value of the proposed pizza shop is. Should Joe expand his pizza shop empire?

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