Rick hired a consulting firm to scope out various buildings he could buy as a potential investment, although at the time he was unsure what he might use any such building for. The consulting firm was paid $20,000 for their services. The building they found will cost Rick $3.5 MM if he decides to go ahead with the project. To begin manufacturing, Rick will also need to spend $2.75 MM on equipment. The building has a CCA Rate of 10%, while the equipment has a CCA Rate of 20%.
Capitalizing on the success of his imaginary pizza shop, Rick will sell two types of frozen pizza the Gut Buster which will have an initial wholesale price of $6.95, and the Skinny Whinney which will have an initial wholesale price of $5.45. Variable costs for the Gut Buster are $3.72, and for the Skinny Whinney of $3.08. Initial annual fixed costs are forecast to be approximately $450,000. The wholesale price, variable costs and fixed costs are all expected to increase annually at the anticipated rate of inflation of 2.5%. Initial working capital needs are forecast to be $42,000, and thereafter be 14% of Sales.
First year sales are expected to be 90,000 units of Gut Buster and 85,000 units of Skinny Whinney. Unit sales are expected to grow 15% for years 1 7, and then beginning in year 8 are expected to grow 3% per year.
At the end of 18 years, Rick is hoping that he will be able to sell the manufacturing business on an as-is basis for $26.22 MM. Tax effects at the end of the 18-year life of the plant can be ignored for the purpose of this analysis. The tax rate is anticipated to be 28%, and the discount rate is 12.5%.
Please analysis of whether or not Rick should go into the frozen pizza manufacturing business.
With the after-effects of the COVID crisis still lingering, Rick realizes that his perpetual dreams of expanding his fictitious pizza empire will have to change focus for a year or two or three). Instead of building a new pizza shop, Rick has decided to expand into the frozen pizza manufacturing business. This Rick hopes will be a long-term venture, as his investment portfolio is looking like it was one of the serious cases of COVID and thus dreams of retirement are pushed into the deep future. Therefore, Rick envisions that this frozen pizza manufacturing business will have an 18 year life-span. Rick was quick out of the gate and hired a consulting firm to scope out various buildings he could buy as a potential investment, although at the time he was unsure what he might use any such building for. The consulting firm was paid $20,000 for their services. The building they found will cost Rick $3.5 MM if he decides to go ahead with the project. To begin manufacturing, Rick will also need to spend $2.75 MM on equipment. The building has a CCA Rate of 10%, while the equipment has a CCA Rate of 20%. Capitalizing on the success of his imaginary pizza shop, Rick will sell two types of frozen pizza - the Gut Buster which will have an initial wholesale price of $6.95, and the Skinny Whinney which will have an initial wholesale price of $5.45. Variable costs for the Gut Buster are $3.72, and for the Skinny Whinney of $3.08. Initial annual fixed costs are forecast to be approximately $450,000. The wholesale price, variable costs and fixed costs are all expected to increase annually at the anticipated rate of inflation of 2.5%. Initial working capital needs are forecast to be $42,000, and thereafter be 14% of Sales. First year sales are expected to be 90,000 units of Gut Buster and 85,000 units of Skinny Whinney. Unit sales are expected to grow 15% for years 1-7, and then beginning in year 8 are expected to grow 3% per year.|| At the end of 18 years, Rick is hoping that he will be able to sell the manufacturing business on an as-is basis for $26.22 MM. Tax effects at the end of the 18-year life of the plant can be ignored for the purpose of this analysis. The tax rate is anticipated to be 28%, and the discount rate is 12.5% Prepare an analysis of whether or not Rick should go into the frozen pizza manufacturing business. With the after-effects of the COVID crisis still lingering, Rick realizes that his perpetual dreams of expanding his fictitious pizza empire will have to change focus for a year or two or three). Instead of building a new pizza shop, Rick has decided to expand into the frozen pizza manufacturing business. This Rick hopes will be a long-term venture, as his investment portfolio is looking like it was one of the serious cases of COVID and thus dreams of retirement are pushed into the deep future. Therefore, Rick envisions that this frozen pizza manufacturing business will have an 18 year life-span. Rick was quick out of the gate and hired a consulting firm to scope out various buildings he could buy as a potential investment, although at the time he was unsure what he might use any such building for. The consulting firm was paid $20,000 for their services. The building they found will cost Rick $3.5 MM if he decides to go ahead with the project. To begin manufacturing, Rick will also need to spend $2.75 MM on equipment. The building has a CCA Rate of 10%, while the equipment has a CCA Rate of 20%. Capitalizing on the success of his imaginary pizza shop, Rick will sell two types of frozen pizza - the Gut Buster which will have an initial wholesale price of $6.95, and the Skinny Whinney which will have an initial wholesale price of $5.45. Variable costs for the Gut Buster are $3.72, and for the Skinny Whinney of $3.08. Initial annual fixed costs are forecast to be approximately $450,000. The wholesale price, variable costs and fixed costs are all expected to increase annually at the anticipated rate of inflation of 2.5%. Initial working capital needs are forecast to be $42,000, and thereafter be 14% of Sales. First year sales are expected to be 90,000 units of Gut Buster and 85,000 units of Skinny Whinney. Unit sales are expected to grow 15% for years 1-7, and then beginning in year 8 are expected to grow 3% per year.|| At the end of 18 years, Rick is hoping that he will be able to sell the manufacturing business on an as-is basis for $26.22 MM. Tax effects at the end of the 18-year life of the plant can be ignored for the purpose of this analysis. The tax rate is anticipated to be 28%, and the discount rate is 12.5% Prepare an analysis of whether or not Rick should go into the frozen pizza manufacturing business