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Rick is considering expanding his pizza shop empire. He currently has several stores, and this will be an addition to his existing shops. For the startup costs, Rick expects that he will need to spend $450,000 on pizza-making equipment. This equipment will have a CCA Rate of 28%. Rick expects to be in business for 13 years at which time the equipment will have a value of only $50,000. In addition, Rick expects he will need $100,000 of initial working capital, and thereafter working capital will be 33% of Sales. All working capital will be recovered at the end of 13 years. To help with his analysis, Rick last year paid a consulting group $35,000 to do a test market analysis for the expected demand.

There will be two sizes of Pizza; Large and The Gut Buster. (Seriously what type of rational person orders a small or a medium pizza!) Initial unit sales of Large will be 3500 pies, and unit sales of the Gut Buster are expected to be 5500 pies. The initial sales price for the Large will be $12, while for the Gut Buster $20. Unit sales are expected to grow 5% each year for the first 10 years and then remain at a constant level starting at year 11. Each Large Pizza costs $4 to make, while each Gut Buster costs $6.

Some of his current customers will go to the new shop instead of one of the existing shops that Rick currently operates. Rick expects that he will lose sales of 600 Large pies and 700 Gut Busters at his existing shops.

With each Large pizza sold, Rick expects to sell 1 beverage, while for each Gut Buster he will sell an average of 2.5 beverages. The first year, each beverage will sell for $2.50 and will have a cost to Rick of $0.75. Fixed costs are expected to be $100,000 per year and will grow with inflation. All prices and costs are expected to increase with inflation which is forecast to be 2.4%. The tax rate is 25% and the appropriate discount rate is 12%.

Determine the payback period, the Internal Rate of Return, and what the Net Present Value of the proposed pizza shop is. Should Rick expand his pizza shop empire?

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