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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

You are the analyst for a Pistol Petes 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. Two options are being explored. Purchasing a new van that is ready to go, or purchasing a used van that would require some customization, which would add to the initial cost.
New Van Used Van
Cost of Van $65,000 $48,000
Customization Expense $0 $10,000
With respect to these figures, experience suggests that the expected life for the project would be 3-years, based on IRS rules. The company will depreciate the equipment using the MACRS over the life of the project.
Year 3-Year MACRS
133.00%
245.00%
315.00%
47.00%
Both vans would be sold at the end of the project. The projected salvage value for the new van would be $25,000 at project end, while the used van could be expected to have a value of $10,500. A working capital requirement would arise at the time of the investment but would be released upon the termination of the project. For the old van, working capital would increase by $3,500 and for the new van, working capital would increase by $2,000.
In addition to the cost estimates, expected earnings for the two investments would be as follows:
Years 1-3 Annual expected earnings before taxes
Used Van $28,000
New Van $30,000
Because this will increase their volume, food costs will also go up. For the used van, theyll spend an additional $5,000 per year and for the new van food cost will increase by $6,000 per year.
The companys current WACC is 7.5%. However, if the Federal Reserve continues to raise interest rates, they estimate that their WACC will increase to 10%. Compare both projects at both WACC estimates so that Pistol Petes can make a plan based on both potential outcomes.
Please help me solve these problems for the Used Van and Old Van also use these spreedsheets in the pictures below:
image text in transcribed

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