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Sara and Joe own a small pizzeria. They have one old pizza oven that can cook three pizzas at a time. The pizzas take 5 minutes to make and 20 minutes to cook. Based on these assumptions, They can cook and deliver 6 Pizzas an hour. Looking to expand their business, they paid a local marketing consultant $1,500 to estimate growth demand. The report estimated demand of 8 pizzas an hour and is contemplating two potential scenarios to increase output:

1. Buying and installing a second pizza oven for a cost of $8,000 will allow them to double their output per hour. The existing range will need approximately 1,000/year in maintenance and repair. Doing so will enable it to last an additional 3 years.

2. Buying a replacement oven for $20,000 will allow them to make 8 pizzas/hour. They will be able to sell their fully depreciated existing range for $3,000.

Calculate the incremental earnings & cashflow, NPV, & IRR of each scenario to determine the best option using the following additional assumptions:

1. Pizzas sell for $20/each and have a cost of $5 to make.

2. Current daily payroll is $500/day.

3. In order t meet new demand they will need to hire another staff member at a salary of $150/day.

4. Current el ctrical costs are $5/hour for 1 oven. They estim te a charge of $10/hour for 2 ovens and $8/hour for the larger oven.

5. They pay r nt of $3,000/month.

6. As an LLC hey pay an 18% tax rate and a 25% capital gains rate.

7. The helpful life of the pizza oven is 3 years (straight-line depreciation).

8. The pizzeri is open 10 hours a day, six days per week, 50 weeks per year.

9. Assume they b y the pizza oven at the end of this year, and the analysis is for the next 3 years.

10. Whatever opti n they choose, they will need to replace one, or both ovens, at the end of 3 years and will be able to sell the larger oven for 2,000 and the newer smaller one for 1,500. There is no s lvage after this year for the existing oven.

11. They estimate their cost of capital/required return to be 8%.

Bonus: What capital investment cost for the larger oven would make the NPVs for both scenarios equal to each other?

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