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Romanos Pizzas, Inc., operates pizza shops in several states. One of the companys most profitable shops
is located adjacent to the campus of a large university. A small bakery next to the shop has just gone out of
business, and Romanos Pizzas has an opportunity to lease the vacated space beginning at $26,000 per
year under a 15-year lease, beginning the first day of the lease, not the end of the first year of the lease.
Romanos management is considering the following regarding the newly vacated space.
The pizza shop in this location is currently selling 40,000 pizzas per year. Management is
confident that the number of pizzas sold could increased by 75% by taking out the wall between the pizza shop
and the vacant space and expanding the pizza outlet. Costs for remodeling and for new equipment would be
$1,100,000. Management estimates that 20% of the new sales would be small pizzas, 50% would be medium
pizzas, and 30% would be large pizzas. Selling prices and costs for ingredients for the three sizes of pizzas
follow (per pizza):
			Selling price	Cost of ingredients
			Price	Ingredients
		Small	$15.70	$4.30
		Medium	$19.00	$6.00
		Large	$22.00	$8.40
Romano's expects to increase the sales price of their Small pizza $0.40 each year; Medium pizza $0.50 each year,
and Large pizza $0.65 each year. Cost of ingredients for all sizes are expected to increase 4% each year.
The equipment would have a salvage value of $30,000 at the end of the 15th year, when the lease ends.
Additional costs predicted to be associated with the expansion are:
Rent (mentioned above), beginning at $26,000 annually, and expected to increase 4% every two years.
Salaries, $108,000 annually and expected to increase 3% each year.
Utilities, $24,800 annually and expected to increase 2% each year.
Insurance and other, $13,600 annually and expected to increase 1.5% each year.
Romano's requires a rate of return of 16% or more before accepting a new project.
Required:
1) Name and define the analytical techniques that should be used to anayze the proposal.
2) Perform the analyses. Should Romano's go ahead with the expansion, and why do you conclude this?

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