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. 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. 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: 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 7.5%. However, if the Federal Reserve continues to raise rest rates, they estimate that their WACC will increase to 10%. Compare both projects at WACC estimates so that Pistol Pete's can make a plan based on both potential outcomes. estions: 1. Using the provided Excel template and the information you learned in Chapter 12, and assuming that the company faces a marginal corporate tax rate of 21 percent on earnings and other cash flows, a. Estimate the project's cash flows for each year (03) as shown in your template. b. Calculate the net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), payback and discounted payback for each investment. Do not use Microsoft Excel for these calculations (you will not have Excel during the final exam) but record your answers on your spreadsheet. Provide your calculations as supplemental documentation in the form of a scan or picture. c. Provide a written recommendation to the company as to which project the firm should accept. i. Make sure to carefully explain in some detail the why of your findings and recommendation. ii. Which method (i.e., NPV, IRR, MIRR, payback or discounted payback) is best to make the decision and why? Rank these methods from Best to Worse. 2. Outline any other factors that you think Pistol Pete's Pizza Palace, LLC should consider prior to making its final decision on these projects, and whether, in your opinion, any of these factors warrant acceptance of one project over another, independent of financial concerns. 30 Use the following Section to Determine Cumulative Cash Flows for your Payback Period and Discounted Payback Period Methodologies 31 32 Cash Flow Cash Flow 33 Cumulative CF Cumulative CF 34 35 Cash Flow Cash Flow 36 PV factor 1/(1+0.10) year PV factor 1/(1+0.10) year 37 Discounted CF Discounted CF 38 Cumulative Discounted CF Cumulative Discounted CF 39 40 Cash Flow Cash Flow 41 PV factor 1/(1+0.075) year PV factor 1/(1+0.075) year 42 Discounted CF Discounted CF 43 Cumulative Discounted CF Cumulative Discounted CF 44 45 Do not use Excel functions to calculate NPV, IRR and MIRR because you will not have Excel for the Final Exam. 46 Use your Financial Calculator, but record your answers here. Include a scan or photo of your calculations for full credit. 47 48 NPV@10\% NPV@10\% 49 IRR IRR 50 Payback Period Payback Period 51 Discounted Payback Period Discounted Payback Period 52 MIRR@10\% MIRR@10\% 53 54 NPV@7.5\% NPV@7.5\% 55 IRR IRR 56 Payback Period Payback Period 57 Discounted Payback Period Discounted Payback Period 58 MIRR@7.5\% MIRR@7.5\% 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. 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. 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: 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 7.5%. However, if the Federal Reserve continues to raise rest rates, they estimate that their WACC will increase to 10%. Compare both projects at WACC estimates so that Pistol Pete's can make a plan based on both potential outcomes. estions: 1. Using the provided Excel template and the information you learned in Chapter 12, and assuming that the company faces a marginal corporate tax rate of 21 percent on earnings and other cash flows, a. Estimate the project's cash flows for each year (03) as shown in your template. b. Calculate the net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), payback and discounted payback for each investment. Do not use Microsoft Excel for these calculations (you will not have Excel during the final exam) but record your answers on your spreadsheet. Provide your calculations as supplemental documentation in the form of a scan or picture. c. Provide a written recommendation to the company as to which project the firm should accept. i. Make sure to carefully explain in some detail the why of your findings and recommendation. ii. Which method (i.e., NPV, IRR, MIRR, payback or discounted payback) is best to make the decision and why? Rank these methods from Best to Worse. 2. Outline any other factors that you think Pistol Pete's Pizza Palace, LLC should consider prior to making its final decision on these projects, and whether, in your opinion, any of these factors warrant acceptance of one project over another, independent of financial concerns. 30 Use the following Section to Determine Cumulative Cash Flows for your Payback Period and Discounted Payback Period Methodologies 31 32 Cash Flow Cash Flow 33 Cumulative CF Cumulative CF 34 35 Cash Flow Cash Flow 36 PV factor 1/(1+0.10) year PV factor 1/(1+0.10) year 37 Discounted CF Discounted CF 38 Cumulative Discounted CF Cumulative Discounted CF 39 40 Cash Flow Cash Flow 41 PV factor 1/(1+0.075) year PV factor 1/(1+0.075) year 42 Discounted CF Discounted CF 43 Cumulative Discounted CF Cumulative Discounted CF 44 45 Do not use Excel functions to calculate NPV, IRR and MIRR because you will not have Excel for the Final Exam. 46 Use your Financial Calculator, but record your answers here. Include a scan or photo of your calculations for full credit. 47 48 NPV@10\% NPV@10\% 49 IRR IRR 50 Payback Period Payback Period 51 Discounted Payback Period Discounted Payback Period 52 MIRR@10\% MIRR@10\% 53 54 NPV@7.5\% NPV@7.5\% 55 IRR IRR 56 Payback Period Payback Period 57 Discounted Payback Period Discounted Payback Period 58 MIRR@7.5\% MIRR@7.5\%