You are the analyst for a Pistol Pete’s Pizza Palace, a restaurant that is thinking of...

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You are the analyst for a Pistol Pete’s Pizza Palace, arestaurant that is thinking of expanding their business to includecatering for at least the next three years. To take on thisproject, the restaurant would need to purchase a van to transportfood to customer locations. The price of the van is $42,000, andthere would be a customization expense of $10,000 to modify the vanfor this special use. The vehicle would be depreciated using the3-year MACRS schedule (33%, 45%, 15%, and 7%) and be sold at theend of 3 years for $5,500. This project would increase sales by$25,000 annually and increase food costs by $5,000. There wouldalso be an increase in net operating working capital of $2,500. Therestaurant’s current tax rate is 21%, and their WACC is 10%.
Based on the Capital Budgeting Techniques we’re learning aboutin class, should the restaurant expand their business to includecatering services? Why or why not? Once you have calculated thecash flows for this project, you will also need to calculate theproject’s payback period, discounted payback period, NPV, IRR andMIRR.
Now assume the restaurant's WACC falls to 7.5% and calculate theNPV, IRR, MIRR, payback period and discounted payback period. Wouldthis change your recommendation? Why or why not?

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4.4 Ratings (917 Votes)

All financials below are in Total capital expenditure depreciable basis 42000 10000 52000After 3 years tax basis undepreciated cost 52000 x 7 3640Sale value See Answer

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You are the analyst for a Pistol Pete’s Pizza Palace, arestaurant that is thinking of expanding their business to includecatering for at least the next three years. To take on thisproject, the restaurant would need to purchase a van to transportfood to customer locations. The price of the van is $42,000, andthere would be a customization expense of $10,000 to modify the vanfor this special use. The vehicle would be depreciated using the3-year MACRS schedule (33%, 45%, 15%, and 7%) and be sold at theend of 3 years for $5,500. This project would increase sales by$25,000 annually and increase food costs by $5,000. There wouldalso be an increase in net operating working capital of $2,500. Therestaurant’s current tax rate is 21%, and their WACC is 10%.Based on the Capital Budgeting Techniques we’re learning aboutin class, should the restaurant expand their business to includecatering services? Why or why not? Once you have calculated thecash flows for this project, you will also need to calculate theproject’s payback period, discounted payback period, NPV, IRR andMIRR.Now assume the restaurant's WACC falls to 7.5% and calculate theNPV, IRR, MIRR, payback period and discounted payback period. Wouldthis change your recommendation? Why or why not?