"Pico's Pizzeria, a popular establishment known for its delicious pizzas, is considering a strategic investment to upgrade its equipment. Specifically, the company is contemplating the purchase of a state-of-the-art pizza oven, which comes with a hefty price tag of $400,000. However, this investment is anticipated to enhance operational efficiency and boost profitability in the long run.

Upon careful evaluation, it is projected that the new pizza oven will generate net positive cash flows of $105,000 per year for a duration of seven years. These cash flows are expected to contribute significantly to the company's bottom line and overall financial health over the investment horizon. It's worth noting that the oven is expected to have no residual value at the end of its useful life, which aligns with its seven-year expected lifespan.

Now, to make an informed decision about this investment opportunity, Pico's Pizzeria needs to conduct a thorough financial analysis. This analysis involves assessing the net present value (NPV) of the investment, considering the required rate of return of 12%. By calculating the NPV, the company can determine the present value of the cash flows associated with the investment and assess whether the returns justify the initial outlay.

Furthermore, in addition to NPV, it's crucial to explore another key financial metric: the internal rate of return (IRR). The IRR represents the discount rate at which the present value of the cash inflows equals the initial investment outlay. By calculating the IRR, Pico's Pizzeria can gain insights into the implied rate of return of the investment and compare it against the required rate of return to gauge its attractiveness.

Considering the strategic significance of this investment decision, Pico's Pizzeria seeks your expertise in financial analysis to determine the feasibility and desirability of investing in the new pizza oven.

A. Calculate the net present value of the investment at a required rate of return of 12%. Based on this analysis, provide a recommendation regarding whether Pico should proceed with the investment in the oven.

B. Additionally, compute the internal rate of return (IRR) of the investment, ensuring accuracy within 1%. Interpret the IRR results and assess its implications for the investment decision.

Through a comprehensive evaluation of the financial metrics and careful consideration of the investment's potential impact on business operations, advise Pico's Pizzeria on the optimal course of action regarding the acquisition of the new pizza oven."

Answer rating: 100% (QA)

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