Week 9, Day 2 Comprehensive Problem (Burrito Grande) After five years, you have built a strong restaurant business called Burrito Grande. You have six locations and each of them are doing well. Its time to expand. After thorough analysis you decide to open six new locations. You want them to be almost exactly the same, thereby reducing the design and build costs. Your existing business generates $12 million in revenue, has cost of goods sold of approximately $8 million, and operating expenses of $4.5 million. The company's existing assets are fully depreciated. You believe the new locations will be able to generate $1.8 million each in their first year, which will grow by 12% each year thereafter. Gross margins and operating margins are expected to be the same as the existing business Each new location will cost $2.3 million to design and build and require an additional investment in working capital of $500,000. You plan to open two locations in year one. One in year two, and three and two in year four. You expect to sell the business at the end of year six at a 6x multiple of after tax cash flow. The business has a tax rate of 36%, now that Biden is going to get elected. The company's WACC is 6.2% Calculate the NPV and IRR of the expansion. Calculate the value of the combined business using the NPV approach. A spreadsheet has been created for your analysis, which you can download from Canvas. A similar spreadsheet, with the solutions, can also be downloaded from Canvas after you have made your own valiant effort. Burrito Grande Five Year Estimates 2 3 0 1 4 5 6 Existing Business Revenue -COGS COGS Margin - Operating Expenses - Depreciation Pre-Tax Income Expansions Expansion 1 Investments Working Cap Revenue - COGS - Operating Expense Pre-Tax Income - Taxes + Depreciation After Tax Cash Flow Expansion 2 Investments Working Cap Revenue -COGS - Operating Expense Pre-Tax Income - Taxes + Add Depreciation After Tax Cash Flow Expansion 3 Investments Working Cap Revenue -COGS - Operating Expense Pre-Tax Income - Taxes + Add Depreciation After Tax Cash Flow Expansion 4 Investments Working Cap Revenue -COGS - Operating Expense Pre-Tax Income Taxes + Add Depreciation After Tax Cash Flow Expansion Cash Flows Investment Operating Terminal Recapture WC Total Cash Flows NPV IRR Rate Firm Value Investment Operating Terminal Recapture WC Total Cash Flows NPV IRR Rate Week 9, Day 2 Comprehensive Problem (Burrito Grande) After five years, you have built a strong restaurant business called Burrito Grande. You have six locations and each of them are doing well. Its time to expand. After thorough analysis you decide to open six new locations. You want them to be almost exactly the same, thereby reducing the design and build costs. Your existing business generates $12 million in revenue, has cost of goods sold of approximately $8 million, and operating expenses of $4.5 million. The company's existing assets are fully depreciated. You believe the new locations will be able to generate $1.8 million each in their first year, which will grow by 12% each year thereafter. Gross margins and operating margins are expected to be the same as the existing business Each new location will cost $2.3 million to design and build and require an additional investment in working capital of $500,000. You plan to open two locations in year one. One in year two, and three and two in year four. You expect to sell the business at the end of year six at a 6x multiple of after tax cash flow. The business has a tax rate of 36%, now that Biden is going to get elected. The company's WACC is 6.2% Calculate the NPV and IRR of the expansion. Calculate the value of the combined business using the NPV approach. A spreadsheet has been created for your analysis, which you can download from Canvas. A similar spreadsheet, with the solutions, can also be downloaded from Canvas after you have made your own valiant effort. Burrito Grande Five Year Estimates 2 3 0 1 4 5 6 Existing Business Revenue -COGS COGS Margin - Operating Expenses - Depreciation Pre-Tax Income Expansions Expansion 1 Investments Working Cap Revenue - COGS - Operating Expense Pre-Tax Income - Taxes + Depreciation After Tax Cash Flow Expansion 2 Investments Working Cap Revenue -COGS - Operating Expense Pre-Tax Income - Taxes + Add Depreciation After Tax Cash Flow Expansion 3 Investments Working Cap Revenue -COGS - Operating Expense Pre-Tax Income - Taxes + Add Depreciation After Tax Cash Flow Expansion 4 Investments Working Cap Revenue -COGS - Operating Expense Pre-Tax Income Taxes + Add Depreciation After Tax Cash Flow Expansion Cash Flows Investment Operating Terminal Recapture WC Total Cash Flows NPV IRR Rate Firm Value Investment Operating Terminal Recapture WC Total Cash Flows NPV IRR Rate