Beaver Pizza would open eight (8) small shops for a cost of $8,400,000. The eigh
ID: 1170616 • Letter: B
Question
Beaver Pizza would open eight (8) small shops for a cost of $8,400,000. The eight shops are expected to generate a net annual cash flow of $1,500,000. The expected life of the shops is 10 years with no expected value at the end of the 10 years. Each small shop will annually generate $850,000 of revenue with a contribution margin of 70%, fixed COGS of $385,000, and fixed SG&A; of $127,500. Beaver Pizza would open three (3) larger shops for a cost of $8,250,000. The three shops are expected to generate a net annual cash flow of $1,080,000. The expected life of the shops is 10 years with an expected residual value of $1,000,000. Each large shop will annually generate $1,875,000 of revenue with a contribution margin of 64%, fixed COGS of $686,667, and fixed SG&A; of $395,000. Plan C -Trailers Beaver Pizza would purchase six (6) fully enclosed pizza trailers and six (6) vans for use at large community events or corporate catering. The trailers cost $85,000 each and the vans cost $48,000 each. Each trailer/van combination is expected to generate a net annual cash flow of $38,000. The expected life of both the trailers and vans is 7 years with an expected residual value of $15,000 per trailer and $12,000 per van. Each trailer will annually generate $110,000 of revenue with a contribution margin of 75%, fixed COGS of $42,643, and fixed SG&A; of $17,000. Assumptions Straight-line depreciation 10% annual required rate of returnExplanation / Answer
Beaver Pizza Operating results forecast Forecast by individual unit Item Plan A-8 Small Shops Plan B-3 Large Shop Plan C-6 Trailers Individual unit Total Project Individual unit Total Project Individual unit Total Project Revenue 6800000 5625000 660000 Variable COGS 2040000 2025000 165000 Variable SG & A Contribution Margin 4760000 3600000 495000 Fixed COGS 3080000 2060001 255858 Notes: Fixed SG & A 1020000 1185000 102000 1 Since tax rate not given thus no tax saving Net Operating Income 660000 354999 137142 2 Calculation of Present value of Outflow Year Plan A-8 Small Shops Plan B-3 Large Shop Plan C-6 Trailers 0 8400000 8250000 798000 .1-10 10 Calculation of Present value of Cash Inflow Year Plan A-8 Small Shops Plan B-3 Large Shop Plan C-6 Trailers 0 .1-10 1500000 1080000 228000 10 0 1000000 162000 Net present value =PVCI- PVCO Plan A = 1500000*PVAF(10yr,10%)- 8400000 = 1500000*6.145- 8400000 = 817500 Plan B =1080000*PVAF(10yr,10%)+1000000*PVF(10yr,10%)-8250000 =(1080000*6.145)+(1000000*.386) -8250000 = -1227400 Plan C = 228000*PVAF(7yr,10%)+ 162000*PVF(7yr,10%)-798000 = (228000*4.868)+(162000*.513)-798000=395010 Beaver Pizza Expansion Options Plan A PlanB PlanC 9896674898 Payback Period= 5.6 7.6388889 3.5 Outflow/Annual cash flow Rate of return= 9.7321429 -14.87758 49.498747 Discounted cash flow received/ Investment Net Present value 817500 -1227400 395000 Profitability Index= 1.0973214 0.8512242 1.495 PVCI/Investment Internal Rate of Return= 12.3 7% 12% Rate at which NPV is zero Calculating IRR for all 3 plans PLAN A NPV Let r be 14% 1500000*PVAF(10yr,14%)- 8400000 = 1500000*5.216- 8400000 =-576000 IRR will be 10%+(817500/1393500)*4% 12.3 PLAN B NPV Let r be 6% 1080000*PVAF(10yr,10%)+1000000*PVF(10yr,10%)-8250000 =(1080000*7.360)+(1000000*.558) -8250000=256800 IRR will be 10%-(1227400/1484200)*4% 7% PLAN C Let r be 14% 228000*PVAF(7yr,10%)+ 162000*PVF(7yr,10%)-798000 = (228000*4.288)+(162000*.400)-798000=244464 IRR will be 10%+(395000/639464)*4% 12% 639464 Ranking Payback Period Rate of return Net Present value Profitability Index Internal Rate of Return 1 PlanC PlanC Plan A PlanC Plan A 2 Plan A Plan A PlanC Plan A PlanC 3 PlanB PlanB PlanB PlanB PlanB