New Project Analysis: You are the analyst for a Pistol Pete's Pizza Palace, a restaurant that is thinking of expanding their business to include catering for at least the next three years. To take on this project, the restaurant would need to purchase a van to transport food to customer locations. The price of the van is $48,000, and there would be a customization expense of $10,000 to modify the van for this special use. The vehicle would be depreciated using the 3-year MACRS Schedule (33%, 45%, 15%, and 7%) and be sold at the end of 3 years for $10,500. This project would increase sales by $28,000 annually and increase food costs by $5,000. There would also be an increase in net operating working capital of $2,500. The restaurant's current tax rate is 21%, and its WACC is 10%. Based on the Capital Budgeting Techniques we're learning about in class, should the restaurant expand their business to include catering services? Why or why not? Once you have calculated the cash flows for this project, you will also need to calculate the project's payback period, discounted payback period, NPV, IRR and MIRR. Now assume the restaurant's WACC falls to 7.5% and calculate the NPV, IRR, MIRR, payback period, and discounted payback period. Would this change your recommendation? Why or why not? NOTE: Your recommendation must be written in paragraph format. Determining Annual Depreciation Expense Year Rate X 0.33 X 1 2. Basis $240 240 Deprec. $ 79 108 3 240 0.45 X 0.15 X 0.07 X 1.00 + 4 240 36 17 $240 Due to the MACRS 12-year convention, a 3-year asset is depreciated over 4 years. 0 1 2 3 MACRS % 33% 45% 15% 7% Investment -50,000 NWC -3,000 2,500 Salvage 5,500 Sales 25,000 25,000 25,000 Costs -5,000 -5,000 -5,000 Depreciation -16,500 -22,500 -7,500 EBT 2,765 -1975 9,875 Tax (21%) Net Income Cash Flows -53,000 19,265 20,525 25,060 NPV -$304.40 IRR 10.31% MIRR 10.21% Payback 2.53 Depreciation = MACRS % x Investment Cash Flows = Investment + NWC + After-tax Salvage + Net Income + Depreciation NPV, IRR and MIRR can be calculated using the same function in excel. New Project Analysis: You are the analyst for a Pistol Pete's Pizza Palace, a restaurant that is thinking of expanding their business to include catering for at least the next three years. To take on this project, the restaurant would need to purchase a van to transport food to customer locations. The price of the van is $48,000, and there would be a customization expense of $10,000 to modify the van for this special use. The vehicle would be depreciated using the 3-year MACRS Schedule (33%, 45%, 15%, and 7%) and be sold at the end of 3 years for $10,500. This project would increase sales by $28,000 annually and increase food costs by $5,000. There would also be an increase in net operating working capital of $2,500. The restaurant's current tax rate is 21%, and its WACC is 10%. Based on the Capital Budgeting Techniques we're learning about in class, should the restaurant expand their business to include catering services? Why or why not? Once you have calculated the cash flows for this project, you will also need to calculate the project's payback period, discounted payback period, NPV, IRR and MIRR. Now assume the restaurant's WACC falls to 7.5% and calculate the NPV, IRR, MIRR, payback period, and discounted payback period. Would this change your recommendation? Why or why not? NOTE: Your recommendation must be written in paragraph format. Determining Annual Depreciation Expense Year Rate X 0.33 X 1 2. Basis $240 240 Deprec. $ 79 108 3 240 0.45 X 0.15 X 0.07 X 1.00 + 4 240 36 17 $240 Due to the MACRS 12-year convention, a 3-year asset is depreciated over 4 years. 0 1 2 3 MACRS % 33% 45% 15% 7% Investment -50,000 NWC -3,000 2,500 Salvage 5,500 Sales 25,000 25,000 25,000 Costs -5,000 -5,000 -5,000 Depreciation -16,500 -22,500 -7,500 EBT 2,765 -1975 9,875 Tax (21%) Net Income Cash Flows -53,000 19,265 20,525 25,060 NPV -$304.40 IRR 10.31% MIRR 10.21% Payback 2.53 Depreciation = MACRS % x Investment Cash Flows = Investment + NWC + After-tax Salvage + Net Income + Depreciation NPV, IRR and MIRR can be calculated using the same function in excel