Question
In: Accounting
Project 2: Capital Budgeting Activity Scenario: Your client owns a successful restaurant in downtown Chicago (at...
Project 2: Capital Budgeting Activity
Scenario:
Your client owns a successful restaurant in downtown Chicago (at
least pre-Covid-19!). She wants to open a second restaurant in the
suburbs and has asked you to help her choose between two locations.
Key information is listed below. Using the four capital budgeting
methods that we know, prepare a presentation that shows your
recommendation to your client (and why).
Initial Investment: 2,500,000 and use 9% discount rate
| Forest Park (10% tx rate) | Rosemont (10.25% tx rate) | |
| Annual Cash Flows | $1,000,000 | $1,100,000 |
| Annual Cash Outflows | $400,000 | $650,000 |
| # years of expected useful life of project | 25 | 30 |
Annual non-cash (all depreciation) expenses:
Use straight line depreciation to find!
For both, assume no residual value and: 9% discount rate
REQUIREMENTS:
Calculate the following and note each formula
- Payback Period
- NPV
- Internal Rate of Return Method
- Profitability Index
Solutions
Expert Solution
Kindly give a positive review and in case of
clarifications,kindly ask in comments.
I have first solved Forest Park and then Rosemount.
Preferred option is Forest Park.
Further,It has been assumed that annual cash outflows and inflows
given are before taxes.
| Forest Park | Present Value Annuity Factoring | ||
| Year 0 | (2,500,000.00) | 1 | (2,500,000.00) |
| Year 1-25 | 550,000.00 | $9.82 | 5,401,000.00 |
| NPV | 2,901,000.00 | ||
| Cashflow per year | |||
| =(Annual Cash Inflow-Annual Cash outflow-Depreciation)*(1-tax rate))+(Depreciation) | |||
| =((1000000-400000-(2500000/25))*0.9)+(2500000/25) | |||
| 550,000.00 | |||
| Payback Period | |||
| =Initial Investment/Annual Net Cashflows | |||
| =2500000/550000 | |||
| 4.55 | |||
| Profitability Index | |||
| =Initial Investment+NPV/Initial Investment | |||
| =(2500000+2901000)/2500000 | |||
| 2.16 | |||
| IRR | 22% | =IRR(Select below values) | |
| Year | Amount | ||
| 0 | (2,500,000.00) | ||
| 1 | 550,000.00 | ||
| 2 | 550,000.00 | ||
| 3 | 550,000.00 | ||
| 4 | 550,000.00 | ||
| 5 | 550,000.00 | ||
| 6 | 550,000.00 | ||
| 7 | 550,000.00 | ||
| 8 | 550,000.00 | ||
| 9 | 550,000.00 | ||
| 10 | 550,000.00 | ||
| 11 | 550,000.00 | ||
| 12 | 550,000.00 | ||
| 13 | 550,000.00 | ||
| 14 | 550,000.00 | ||
| 15 | 550,000.00 | ||
| 16 | 550,000.00 | ||
| 17 | 550,000.00 | ||
| 18 | 550,000.00 | ||
| 19 | 550,000.00 | ||
| 20 | 550,000.00 | ||
| 21 | 550,000.00 | ||
| 22 | 550,000.00 | ||
| 23 | 550,000.00 | ||
| 24 | 550,000.00 | ||
| 25 | 550,000.00 | ||
Rosemount
| Rosemont | Present Value Annuity Factoring | ||
| Year 0 | (2,500,000.00) | 1 | (2,500,000.00) |
| Year 1-30 | 412,416.67 | $10.27 | 4,235,519.17 |
| NPV | 1,735,519.17 | ||
| Cashflow per year | |||
| =(Annual Cash Inflow-Annual Cash outflow-Depreciation)*(1-tax rate))+(Depreciation) | |||
| =((1100000-650000-(2500000/30))*0.8975)+(2500000/30) | |||
| 412,416.67 | |||
| Payback Period | |||
| =Initial Investment/Annual Net Cashflows | |||
| =2500000/412416.67 | |||
| 6.06 | |||
| Profitability Index | |||
| =Initial Investment+NPV/Initial Investment | |||
| =(2500000+1735519.17)/2500000 | |||
| 1.69 | |||
| IRR | 16% | ||
| Year | Amount | ||
| 0 | (2,500,000.00) | ||
| 1 | 412,416.67 | ||
| 2 | 412,416.67 | ||
| 3 | 412,416.67 | ||
| 4 | 412,416.67 | ||
| 5 | 412,416.67 | ||
| 6 | 412,416.67 | ||
| 7 | 412,416.67 | ||
| 8 | 412,416.67 | ||
| 9 | 412,416.67 | ||
| 10 | 412,416.67 | ||
| 11 | 412,416.67 | ||
| 12 | 412,416.67 | ||
| 13 | 412,416.67 | ||
| 14 | 412,416.67 | ||
| 15 | 412,416.67 | ||
| 16 | 412,416.67 | ||
| 17 | 412,416.67 | ||
| 18 | 412,416.67 | ||
| 19 | 412,416.67 | ||
| 20 | 412,416.67 | ||
| 21 | 412,416.67 | ||
| 22 | 412,416.67 | ||
| 23 | 412,416.67 | ||
| 24 | 412,416.67 | ||
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Scenario:
Your client owns a successful restaurant in downtown Chicago (at
least pre-Covid-19!). She wants to open a second restaurant in the
suburbs and has asked you to help her choose between two locations.
Key information is listed below. Using the four capital budgeting
methods that we know, prepare a presentation that shows your
recommendation to your client (and why).
Initial Investment: 2,500,000 and use 9% discount rate
Forest Park (10% tx rate)
Rosemont (10.25%...
Capital Budgeting Activity Scenario: Your client owns a successful restaurant in downtown Chicago (at least pre-Covid-19!)....Capital Budgeting Activity Scenario: Your client owns a
successful restaurant in downtown Chicago (at least pre-Covid-19!).
She wants to open a second restaurant in the suburbs and has asked
you to help her choose between two locations.
Key information is listed below. Using the four capital
budgeting methods that we know, prepare a presentation that shows
your recommendation to your client (and why).
Initial Investment: 2,500,000 and use 9% discount rate
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