Suppose you own a restaurant and are considering adding a new sandwich, the Jareds Sub Deluxe to the menu. Although you have made up your mind to move this project ahead, you are planning to spend $10,000 immediately on a market study to identify target customers. The prior market study cost $25,000 and revealed the following items:

1 of 4 Jareds Sub Deluxe orders will come from current customers. The report shows that these customers will not increase the frequency of their visits nor the amount they spend per visit.

You must price the Jareds Sub Deluxe the same as your other sandwiches. All of your sandwiches have the same variable cost structure.

This project will require your culinary talents. Therefore, you would have to quit your $40,000 per year job as a chef. The salary of your chef position is not expected to increase over the next 3 years.

Your customers are more likely to purchase potato chips with their order. It is estimated that all of your new customers will add chips to their orders.

Your old customers will continue to get chips with their orders.

Additional soft drink sales will be sold exactly at cost.

You have been working hard to estimate the costs and revenues associated with this 3-year project. You estimate that equipment for this project will cost $45,000 today and will be straight-line depreciated to $15,000 over 3 years. The equipment should have a market value of $5,000 at the conclusion of the project but you plan to use it for your next sandwich creation. In addition, you estimate that 200,000 Jareds Sub Deluxe sandwiches will be ordered per year at a price of $2 each for the next 3 years. Chips are an additional $1 per order. The variable costs per unit are estimated to be $1 per sandwich and $.50 for the chips. Fixed costs are expected to be $30,000 per year and the tax rate is 40%. You also estimate that net working capital will be increased by $15,000 immediately but will be recovered at the end of the project. The appropriate cost of capital for this project is 15%.

1. Calculate the IRR.

2. Calculate the NPV