Pizza Hut Motivation System
Capital Budgeting
1. Barbarian Pizza is analyzing the prospect of purchasing an additional fire brick oven. The oven costs $200,000 and would be depreciated (straight-line to a salvage value of $120,000 in 10 years. The extra oven would increase annual revenues by $120,000 and annual operating expenses by $90,000. Barbarian’s marginal tax rate is 25%.
a. What would be the initial, operating, and terminal cash flows generated by the new oven? b. What is the payback period for the additional oven? c. Barbarian Pizza’s RRR is 12%. What is the NPV of the additional oven? d. What is the IRR of the additional oven?
2. Chin Jen Lie is considering the expansion of his chain of Chinese restaurants by opening a new restaurant in Duluth, Minnesota. If he does, he estimates that the restaurant will require a net initial outlay of $500,000. Furthermore, he estimates that the restaurant will generate annual cash flows of $20,000 and that he can sell it for $1,000,000 in 10 years.
a. If Mr. Lie’s RRR is 10%, what is the NPV of opening the restaurant? Should he open the restaurant? b. If Mr. Lie’s RRR is 14%, what is the NPV of opening the restaurant? Should he open the restaurant?
3. Victoria Korchnoi is thinking of importing caviar to sell to restaurants and specialty stores. She estimates that this venture will require an initial outlay of $300,000 to buy a refrigerated storage unit, which can be depreciated (straight-line) to salvage value of $50,000 in eight years. In addition, Ms. Korchnoi estimates that she will need $40,000 in working capital during the eight years of the project. Annual sales are estimated to be $110,000 and annual expenses $20,000. Ms. Korchnoi estimates that the marginal tax rate will be 25% during the lifetime of the project.
a. What is the initial outlay associated with starting the business? b. What is the annual cash flow from operations? c. What will be the terminal
1. Barbarian Pizza is analyzing the prospect of purchasing an additional fire brick oven. The oven costs $200,000 and would be depreciated (straight-line to a salvage value of $120,000 in 10 years. The extra oven would increase annual revenues by $120,000 and annual operating expenses by $90,000. Barbarian’s marginal tax rate is 25%.
a. What would be the initial, operating, and terminal cash flows generated by the new oven? b. What is the payback period for the additional oven? c. Barbarian Pizza’s RRR is 12%. What is the NPV of the additional oven? d. What is the IRR of the additional oven?
2. Chin Jen Lie is considering the expansion of his chain of Chinese restaurants by opening a new restaurant in Duluth, Minnesota. If he does, he estimates that the restaurant will require a net initial outlay of $500,000. Furthermore, he estimates that the restaurant will generate annual cash flows of $20,000 and that he can sell it for $1,000,000 in 10 years.
a. If Mr. Lie’s RRR is 10%, what is the NPV of opening the restaurant? Should he open the restaurant? b. If Mr. Lie’s RRR is 14%, what is the NPV of opening the restaurant? Should he open the restaurant?
3. Victoria Korchnoi is thinking of importing caviar to sell to restaurants and specialty stores. She estimates that this venture will require an initial outlay of $300,000 to buy a refrigerated storage unit, which can be depreciated (straight-line) to salvage value of $50,000 in eight years. In addition, Ms. Korchnoi estimates that she will need $40,000 in working capital during the eight years of the project. Annual sales are estimated to be $110,000 and annual expenses $20,000. Ms. Korchnoi estimates that the marginal tax rate will be 25% during the lifetime of the project.
a. What is the initial outlay associated with starting the business? b. What is the annual cash flow from operations? c. What will be the terminal