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 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

$133\mathrm{.}00\%$

$245\mathrm{.}00\%$

$315\mathrm{.}00\%$

$47\mathrm{.}00\%$

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, they$$ll spend an additional $$5,000$ per year and for the new van food cost will increase by $$6,000$ per year.

The company$$s current WACC is $7\mathrm{.}5\%.$ However, if the Federal Reserve continues to raise interest rates, they estimate that their WACC will increase to $10\%.$ Compare both projects at both WACC estimates so that Pistol Pete$$s 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:

Used Van

Year $0123$

Van cost including modifications

Increase in NOWC

Increase in sales

Increase in costs

Depreciation

Earnings Before Tax

Tax at $21\%$

Earnings After Tax EBIT $(1-$T$)$

Add back depreciation

EBIT $(1-$T$)+$ Depreciation

After Tax Salvage Value

Cash Flow

Depreciation rate

Depreciation $

Salvage Value

Book Value

Gain $($or Loss$)$

Tax on Gain $($or Loss$)$

After Tax Salvage Value

Use the following Section to Determine Cumulative Cash Flows for your Payback Period and Discounted Payback

Cash Flow

Cumulative CF

Cash Flow

PV factor $1/(1+0\mathrm{.}10)^$year

Discounted CF

Cumulative Discounted CF

Cash Flow

PV factor $1/(1+0\mathrm{.}075)^$year

Discounted CF

Cumulative Discounted CF

New Van

Year $0123$

Van cost including modifications

Increase in NOWC

Increase in sales

Increase in costs

Depreciation

Earnings Before Tax

Tax at $21\%$

Earnings After Tax EBIT $(1-$T$)$

Add back depreciation

EBIT $(1-$T$)+$ Depreciation

Cash Flow

Depreciation rate

Depreciation $

Salvage Value

Book Value

Gain $($or Loss$)$

Tax on Gain $($or Loss$)$

After Tax Salvage Value

Use the following Section to Determine Cumulative Cash flows for you payback period and discount payback period methodologies.

Cash Flow

Cumulative CF

Cash Flow

PV factor $1/(1+0\mathrm{.}10)^$year

Discounted CF

Cumulative Discounted CF

Cash Flow

PV factor $1/(1+0\mathrm{.}075)^$year

Discounted CF

Cumulative Discounted CF