Plan A King Pizza would open eight (8) small shops for a cost of $8,400,000. The
ID: 2469171 • Letter: P
Question
Plan A
King 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.
Plan B – Large Shops
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
Straightline depreciation
10% annual required rate of return
Requirement 1:
Calculate the following and rank the projects from best to worst for each metric.
Payback
period Rate of return
Net present value Profitability
index
Internal rate of return
Explanation / Answer
Paln-A:-
Initial Investment = $84,00,000
Net Annual Cash Inflow = 15,00,000
Payback Period = Initial Investment/Net Annual Cash Inflow
= 84,00,000/15,00,000
= 5.6 years
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NPV = P.V of Cash Inflows - Initital Investment
= 15,00,000*PVIFA(10%,10) - 84,00,000
= 15,00,000*6.1446 - 84,00,000
= 92,16,900
=$816,900
.
Profitabilty Index = P.V of Cash Inflows/P.V of cash Outflows
= 92,16,900/84,00,000
= 1.10
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At IRR
P.V of Cash Inflow = P.V of Cash Outflow
15,00,000*PVIFA(IRR,10) = 84,00,000
PVIFA(IRR,10) = 5.6
Computing for IRR , we get IRR = 12.22%
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Plan-B:-
Initial Investment = $82,50,000
Net Annual CAsh Inflow = 10,80,000
Additinal Cash Inflow in 10th year = 10,00,000
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Payback Period = Initial Investment / Annual Cash Inflow
= 82,50,000/10,80,000
= 7.64 years
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NPV = P.V of Cash Inflows - Initial Investment
= [10,80,000*PVIFA(10%,10) + 10,00,000*PVIF(10%,10)] - 82,50,000
= [10,80,000*6.1446 + 10,00,000*0.3855] - 82,50,00
= 70,21,668 - 82,50,000
= -$12,28,332
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PI = 7021,668/82,50,000
= 0.85
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At IRR
P.V of Cash Inflow = P.V of Cash Outflow
[10,80,000*PVIFA(IRR,10) + 10,00,000*PVIF(IRR,10)] = 82,50,000
Computing for IRR , we get IRR = 6,61%
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Plan-C
Initial Investment = 85,000*6 + 48,000*6
= $798,000
Net Cash Inflow = 38,000*12
= $456,000
Additional Cash Inflow in 10th year = 15000*6 + 12000*6
= $162,000
Life = 7 years
Now Compute NPV< PI <IRR <PAYBACH PERIOD AS ABOVE