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Lawrence's Pizza, Inc is a company with 5 pizza restaurants located in college towns in the southeastern United States - Oxford, MS, Tuscaloosa, AL,
Lawrence's Pizza, Inc is a company with 5 pizza restaurants located in college towns in the southeastern United States - Oxford, MS, Tuscaloosa, AL, Athens, GA, Columbia, SC, and Fayetteville, AR. The restaurants are known for two things: (1) cold beer and (2) making your own pizza. With the restaurant, customers roll out their own pizza dough: put sauce, cheese, and toppings on the pizza; and place the pizza in a pizza oven which is set on 850 degrees. The restaurants have combined for revenue of $9.250,400 for the past year, with 40% of the revenue coming from alcohol sales, and the remaining 60% coming from pizza sales. The cost of goods sold for the alcohol is around 20%, while for the pizza it is 30%. The remaining operating expenses (except depreciation) is at 40% of total revenue. Depreciation expense is $500,000 per year. Recently, an honors student at the college in Fayetteville decided to see if he could fit his head in the pizza oven-he could! Unfortunately, he suffered burns over 96% of his head. He sued but lost when the jury learned that the honors student had consumed 10 ice cold beers prior to his head going into the pizza oven. While Lawrence's Pizza did not have to pay out any damages to the burned honors student, they did get visited by numerous state and federal governmental agencies. The government decided that the company needed to do one of two things to keep this from happening in the future: (a) stop selling alcohol completely, or (b) install a barrier on each pizza oven to keep people's heads out them. Option A will not only result in loss alcohol sales, but also a decrease in pizza sales of 25%. Option B will cost $2,500,000 per restaurant to install and may not be depreciated. The company has a tax rate of 25%, a WACC of 10%, and is expected to continue indefinitely into the future. Which option should the company choose and why?
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