Question
Sammy owns a pizza restaurant. He is doing well. He has a little bit of unused space behind his restaurant. Sammy is debating whether it
Sammy owns a pizza restaurant. He is doing well. He has a little bit of unused space behind his restaurant.
Sammy is debating whether it would be better to build a new room at the back of his restaurant in order to grow the business row to just add a patio to the space he has in the back of his building for outdoor seating. The patio would be a lot cheaper but the additional room would bring in more customers as it could be used in all weather. He has asked you to help him perform an analysis.
Sammy has calculated his WACC to be 5.5%. He has obtained some estimates from contractors and says the cost of the new addition is $85K while the patio is only $21K.
The new addition is expected to bring in more revenue. Sammy estimates the following cash flows (in K$):
Year 1: $5
Year 2: $14
Year 3: $27
Year 4: $33
Year 5: $45
The patio is expected to bring in less revenue than the new addition. Sammy estimates the following cash flows (in K$):
Year 1: $3
Year 2: $7
Year 3: $10
Year 4: $11
Year 5: $13
What is the NPV & IRR of the new addition for Sammy's Pizza?
What is the NPV & IRR of the patio project for Sammy's Pizza?
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