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 1 33.00% 2 45.00% 3 15.00% 4 7.00% 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. Questions: 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 projects cash flows for each year (0 3) 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 Petes 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.