John Levitt owns a popular burger stand on a trendy section of Melrose Boulevard. Following the success of his first burger stand, "Johnny's," which has been in operations for five years, John is now considering opening a second burger stand in another trendy location, on Sunset Boulevard in the Silver Lake area. John'smarket researchshows that the clientele in both areas is similar: young professionals, typically without children, who like the traditional aspect of eating burgers, but also relish his gourmet, specially manufactured low-fat burgers and the healthy side dishes his stand also sells. John's overall plan is to get the second stand up and running for four years, and then sell both stands off to a new owner and retire to Santa Barbara.

John estimates that the cost of starting up a second stand will be as follows:

Purchase of retail kiosk (mobile retail food outlet) $900,000

Installation of specialized kitchen equipment $80,000

Furniture and fittings $50,000

John estimates thatyearly operating costs of the new location would be identical tothose of his current stand:

Labor costs, inclusive of all overhead costs:

Kitchen and service staff (3 people) $200,000

License and rent costs $150,000

Raw materials:

Burgers (275 per day x 7 days x 52 weeks) $54,600

Drinks $38,400

Other food supplies $145,800

Nonfood supplies $50,200

Therevenuesat his current location are as follows:

Sales of burgers $8 per burger

Average daily sales 275 burgers

Other food items $350,000

Drinks $190,000

In addition to contributing profits, Jimmy expects that opening a second stand will decrease the cost of purchasing gourmet burgers from 90 cents to 75 cents in both locations. This is due to economies of scale, since the new outlet would double output over the current level of demand. John also expects that he will be able to manage both locations himself, avoiding hiring a second manager for the new location.

Assume that:

Increase in the payables (accounts payable, AP) is expected to be equal to 12% of gross sales; the project will require additional cash (for giving change to the stand's customers paying cash) in the amount of 5% of gross sales. There will be no considerable investment in inventory as John implements "just-in-time" inventory system to keep its burgers fresh. Increase in payables associated with the new stand is estimated to be equal to 15% of the cost of raw products

Net working capital is fully recovered (i.e., reduced to zero) by the end of year 5

The marginal tax rate is 34 percent.

Cost of Capital is 10 percent.

Cost of the stand (kiosk) is depreciated over five years according to thestraight-line method.

The stand is expected to be worth $300,000 after four years of service.

1. Construct a model in Excel to evaluate the project. Use "Home Net" spreadsheet as an example.

2. What is the NPV of this investment?

3. Consider several values of cost of capital (for example, check values between 7% and 13% with 1% step) and compute NPV for each of these values. Use "Data Table" Construct NPV profile : Let cost of capital be your X-variable and NPV be your Y-variable.

4. Set some goal value for NPV (choose a value yourself) and use "goal seek" to find number of burgers that the new stand must sell annually to achieve the goal. To learn how to use "goal seek" please see tutorial video

Additional tutorial videos:

https://www.youtube.com/watch?v=WFhGjMoZZmM

https://www.youtube.com/watch?v=OhnkuBVTcg8

https://www.youtube.com/watch?v=N0NmVhVtP3g( up to 9:45)