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4. Pappa's Pizzeria owns and operates fast-service p izza parlors throughout North America. The firm operates on a regional basis and provides almost complete autonomy to the manager of each region. Regional managers are responsible for long-range planning, capital expenditures, personnel policies, pricing, and so forth. Each year the performance of regional managers is evaluated by determining the accounting return on fixed assets in their regions; a return of 14 percent is expected. To determine this return, regional net income is divided by the book value of fixed assets at the start of the year. Managers of regions earning a return of more than 16 percent are identified for possible promotion, and managers of regions with a return of less than 12 percent are subject to replacement. Mr. Baranuk, with a degree in hotel and restaurant management, is the manager of the Northeast region. He is regarded as a "rising star" and will be considered for years. Baranuk has been with Pappa's for a total of three years. During that period, the return on fixed assets in his region (the oldest in the firm) has increased dramatically He is currently considering a proposal to open five new parlors in the Boston area. The total project involves an investment of $650,000 and will double the number of Pappa's pizzas sold in the Northeast 600,000 per year. At an average price of S6 each, total sales revenue will be $3,600,000 The expenses of operating each of the new parlors include variable costs of $4 per pizza and fixed costs (excluding depreciation) of $80,000 per year. Because each of the new parlors has only a five-year life and no salvage value, yearly straight-line depreciation will be S26,000 [(S650,000 4 5 parlors) 4 5 years]. Required-15 Points a. Evaluate the desirability of the S650,000 investment in new pizza parlors by computing the internal rate of return and the net present value. Assume a time value of money of 14 percent. b. If Baranuk is shrewd, will he approve the expansion? Why or why not? (Additional computations are suggested.) promotion during the next two region to a total of

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