Part 4: Calculate TWM's monthly Net Income at the existing location (cart in the city). Calculate TWM's expected monthly Net Income if they move to the location outside the tax zone. Compare the two and recommend the more profitable location. Hint!: be sure to add the junk food tax to the variable costs at the current location.

Assume one month has four weeks. Ignore payroll and income taxes.

Mike's town has passed a junk food tax. He must pay a tax equal to 25% of sales on the hot dogs and churros. There is no tax on the water. Mike is considering moving his hot dog cart to a location outside the city limits to avoid having to pay the tax.

After scouting locations, Mike realizes he won't get enough foot traffic to support his cart, but he has found a space he can rent for $3,500/month. He will need to pay utilities of approximately $500/month. In lieu of a street vendor permit, he will need to obtain a business license, which is $240/annually in the municipality he is considering. Insurance on the new location is $800/month.

Mikes direct costs will not change in the location, however, he will now need two jars of each of the condiments per month, except for sauerkraut. He'll still only need one jar of sauerkraut per month.

In his new location, Mike will be able to extend his hours to 11am - 7pm to take advantage of the lunch and dinner hour. There is also enough demand that he'll be able to be open seven days per week. In order to extend his hours, he'll need to hire one employee for 40 hours per week at a rate of $20/hour.

Mike estimates he will sell 2,000 hot dogs and 1,200 bottles of water per week. He believes churro sales will decline to only 500 per week.

Part 5.1: Calculate the incremental cash flow from each of the two investment opportunities.

Part 5.2: Use capital budgeting tools to compare the two investment opportunities. Calculate the payback period in months as well as the Net Present Value (NPV) of each of the two investments and recommend the better investment opportunity.

Before Mike had a chance to move his business, the junk food tax was repealed and he has decided to stick with his current location and keep his cart. He has also decided to add a menu item. He can either add hot pretzels or slurpees. When assessing his two investment options, Mike would like to make a minimum return of 10% on his investment.

Pretzels

Mike can buy a pretzel warmer for $25,000. He would sell pretzels for $4/each and can purchase them for $35 for a box of 50 pretzels. He will need a propane tank for the pretzel warmer and estimates he will spend $550/month on fuel. Mike estimates he will sell 30 pretzels each day. Mike estimates he can use the pretzel machine to generate income for five years, after which time it will have a zero value.

Slurpees

Mike can buy a slurpee machine for $35,000. He estimates he can sell 75 slurpees per day for $2/each. His variable costs for slurpees is $0.50 per slurpee for syrup and ice. His fuel costs for operating the slurpee machine should be about $750/month. Mike estimates he can use the slurpee machine to generate income for eight years, after which time it will have zero value.