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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 $ $
Customization Expense $ $
With respect to these figures, experience suggests that the expected life for the project would be years, based on IRS rules. The company will depreciate the equipment using the MACRS over the life of the project.
Year Year MACRS
Both vans would be sold at the end of the project. The projected salvage value for the new van would be $ at project end, while the used van could be expected to have a value of $ 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 $ and for the new van, working capital would increase by $
In addition to the cost estimates, expected earnings for the two investments would be as follows:
Years Annual expected earnings before taxes
Used Van $
New Van $
Because this will increase their volume, food costs will also go up For the used van, theyll spend an additional $ per year and for the new van food cost will increase by $ per year.
The companys current WACC is However, if the Federal Reserve continues to raise interest rates, they estimate that their WACC will increase to 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:
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