Sara and Joe own a small pizzeria. They have 1 old pizza oven that can cook...

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Sara and Joe own a small pizzeria. They have 1 old pizza oven that can cook 3 pizzas at a time. The pizzas take 5 minutes to make and 20 minutes to cook. Based on these assumptions, They can cook and deliver 6 Pizzas an hour. Looking to expand their business, they paid a local marketing consultant $1,500 to estimate growth demand. The report estimated demand of 8 pizzas an hour and are contemplating 2 potential scenarios to increase output: 1. Buying and installing a second pizza oven for a cost of $8,000 that will allow them to double their output per hour. The existing oven will need approximately 1,000/year in maintenance and repair. Doing so will allow it to last an additional 3 years. 2. Buying a replacement oven for $20,000 will allow them to make 8 pizzas/hour. They will be able to sell their fully depreciated existing oven for $3,000. Calculate the incremental earnings & cashflow, NPV, & IRR of each scenario to determine the best option using the following additional assumptions: 1. Pizzas sell for $20/each and have a cost of $5 to make. 2. Current daily payroll is $500/day. 3. In order to meet new demand they will need to hire another staff member at a salary of $150/day. 4. Current electrical costs are $5/hour for 1 oven. They estimate a charge of $10/hour for 2 ovens and $8/hour for the larger oven. 5. They pay rent of $3,000/month. 6. As an LLC they pay an 18% tax rate and 25% capital gains rate. 7. The useful life of the pizza oven is 3-years (straight-line depreciation). 8. The pizzeria is open 10 hours a day, 6-days per week, 50 weeks per year. 9. Assume they buy the pizza oven at the end of this year, and the analysis is for the next 3 years. 10. Whatever option they choose, they will need to replace one, or both ovens, at the end of 3 years and will be able to sell the larger oven for 2,000 and the newer smaller one for 1,500. There is no salvage after this year for the existing oven. 11. They estimate their cost of capital/required return is 8%. Bonus: What capital investment cost for the larger oven would make the NPVs for both scenarios equal to each other. Sara and Joe own a small pizzeria. They have 1 old pizza oven that can cook 3 pizzas at a time. The pizzas take 5 minutes to make and 20 minutes to cook. Based on these assumptions, They can cook and deliver 6 Pizzas an hour. Looking to expand their business, they paid a local marketing consultant $1,500 to estimate growth demand. The report estimated demand of 8 pizzas an hour and are contemplating 2 potential scenarios to increase output: 1. Buying and installing a second pizza oven for a cost of $8,000 that will allow them to double their output per hour. The existing oven will need approximately 1,000/year in maintenance and repair. Doing so will allow it to last an additional 3 years. 2. Buying a replacement oven for $20,000 will allow them to make 8 pizzas/hour. They will be able to sell their fully depreciated existing oven for $3,000. Calculate the incremental earnings & cashflow, NPV, & IRR of each scenario to determine the best option using the following additional assumptions: 1. Pizzas sell for $20/each and have a cost of $5 to make. 2. Current daily payroll is $500/day. 3. In order to meet new demand they will need to hire another staff member at a salary of $150/day. 4. Current electrical costs are $5/hour for 1 oven. They estimate a charge of $10/hour for 2 ovens and $8/hour for the larger oven. 5. They pay rent of $3,000/month. 6. As an LLC they pay an 18% tax rate and 25% capital gains rate. 7. The useful life of the pizza oven is 3-years (straight-line depreciation). 8. The pizzeria is open 10 hours a day, 6-days per week, 50 weeks per year. 9. Assume they buy the pizza oven at the end of this year, and the analysis is for the next 3 years. 10. Whatever option they choose, they will need to replace one, or both ovens, at the end of 3 years and will be able to sell the larger oven for 2,000 and the newer smaller one for 1,500. There is no salvage after this year for the existing oven. 11. They estimate their cost of capital/required return is 8%. Bonus: What capital investment cost for the larger oven would make the NPVs for both scenarios equal to each other.

Answer rating: 100% (QA)

Here are the calculations for the two scenarios Scenario 1 New second oven Incremental earnings Curr... View the full answer