Fill in the blanks, additional information provided in written problem Joe is super excited as he thinks this is the year that his pizza shop expansion ideas are finally going to break out after 21 years of false starts. He has a new recipe for the sauce that he plans to introduce that he thinks will make his new shops something special. In the previous winter he paid a group of consultants $20,000 for an analysis, but it turned out they were bad High School graduates and thus Joe believes he needs another analysis completed. His new shop will be in a commercial building that Joe already owns. The current tenants of the building currently pay $8,000 per month for rent, but Joe is not concerned as he believes the sales of his pizzas will more than make up for the difference. After all, people are tired of COVID and what better way to get over a rough patch than having a pizza with friends. As always, Joe plans to have two pizzas - the Skinny Whinney which retails for $12.85 and costs $6.50 to make. The Gut Buster - always a favorite - retails for $21.55 and costs $11.90 to make. For each Skinny Whinney sold, Joe will sell 1.3 beverages on average, while for each Gut Buster he will sell 3.2 beverages. Each beverage has a retail price of $3.50, and a variable cost of $0.94. Necessary building renovations are expected to cost $80,000 and will be subject to a CCA rate of 10%, while equipment costs are expected to be $58,000 and have a CCA rate of 30%. Joe expects the new shop to be open for seven years at which time he will likely close the business down. The salvage value of the building renovations are expected to be negligible at that time, while the salvage value of the equipment can reasonably be expected to be negligible at that time, while the salvage value of the equipment can reasonably be expected to be around $30,000. You may ignore any terminal CCA tax effects. Joe has a shady accountant so his effective tax rate is only 18%. Joe estimates that the appropriate beta for his company is 2.4 (it's a very risky company!), while equity makes up 40% of the capital structure. Short term debt, has a cost of 8%, and is 20% of the capital structure. Long term debt, which makes up the remainder of the capital structure consists of bonds with a yield of 10%. The risk free rate is currently 2.5%, while the market risk premium is 4%. Inflation for all prices and costs is expected to be 4.5% for years 2,3 and 4 , and fall to 1.9% for years 5 through 7 . Joe plans on closing up the shop at the end of year 7. It is estimated that Joe will need cash of $5,000 and inventory of $20,000 upfront. He will also need a net reserve of $40,000 to cover the net of his Accounts Receivables and Account Payables. Working capital needs thereafter will be approximately 17% of Sales. Obviously, some customers from Joe's existing pizza shops will change their buying habits at his new shop. Joe expects to lose sales of 2000 Skinny Whinneys and 4000 Gut Busters from his existing shops, even though he was careful in choosing his new location so as to make the overlap minimal. First year sales of Skinny Whinneys are expected to be 10,500 and 25,000 for Gut Busters. Unit growth is expected to be 5% per year. Prepare a report that Tells what Joe should do with respect to the decision of whether to open up a new pizza shop. fx Fill in the blanks, additional information provided in written problem Joe is super excited as he thinks this is the year that his pizza shop expansion ideas are finally going to break out after 21 years of false starts. He has a new recipe for the sauce that he plans to introduce that he thinks will make his new shops something special. In the previous winter he paid a group of consultants $20,000 for an analysis, but it turned out they were bad High School graduates and thus Joe believes he needs another analysis completed. His new shop will be in a commercial building that Joe already owns. The current tenants of the building currently pay $8,000 per month for rent, but Joe is not concerned as he believes the sales of his pizzas will more than make up for the difference. After all, people are tired of COVID and what better way to get over a rough patch than having a pizza with friends. As always, Joe plans to have two pizzas - the Skinny Whinney which retails for $12.85 and costs $6.50 to make. The Gut Buster - always a favorite - retails for $21.55 and costs $11.90 to make. For each Skinny Whinney sold, Joe will sell 1.3 beverages on average, while for each Gut Buster he will sell 3.2 beverages. Each beverage has a retail price of $3.50, and a variable cost of $0.94. Necessary building renovations are expected to cost $80,000 and will be subject to a CCA rate of 10%, while equipment costs are expected to be $58,000 and have a CCA rate of 30%. Joe expects the new shop to be open for seven years at which time he will likely close the business down. The salvage value of the building renovations are expected to be negligible at that time, while the salvage value of the equipment can reasonably be expected to be negligible at that time, while the salvage value of the equipment can reasonably be expected to be around $30,000. You may ignore any terminal CCA tax effects. Joe has a shady accountant so his effective tax rate is only 18%. Joe estimates that the appropriate beta for his company is 2.4 (it's a very risky company!), while equity makes up 40% of the capital structure. Short term debt, has a cost of 8%, and is 20% of the capital structure. Long term debt, which makes up the remainder of the capital structure consists of bonds with a yield of 10%. The risk free rate is currently 2.5%, while the market risk premium is 4%. Inflation for all prices and costs is expected to be 4.5% for years 2,3 and 4 , and fall to 1.9% for years 5 through 7 . Joe plans on closing up the shop at the end of year 7. It is estimated that Joe will need cash of $5,000 and inventory of $20,000 upfront. He will also need a net reserve of $40,000 to cover the net of his Accounts Receivables and Account Payables. Working capital needs thereafter will be approximately 17% of Sales. Obviously, some customers from Joe's existing pizza shops will change their buying habits at his new shop. Joe expects to lose sales of 2000 Skinny Whinneys and 4000 Gut Busters from his existing shops, even though he was careful in choosing his new location so as to make the overlap minimal. First year sales of Skinny Whinneys are expected to be 10,500 and 25,000 for Gut Busters. Unit growth is expected to be 5% per year. Prepare a report that Tells what Joe should do with respect to the decision of whether to open up a new pizza shop. fx