Exercise 2: Cambridge Mushroom Cloud Pizzeria You have been retained by Cambridge Mushroom Cloud Pizzeria (CMCP) to investigate the financial impact of a proposed project to convert their pizza ovens to run on solar energy: a) They tell you that $100,000 have already been spent on designing the prototype solar-powered oven. b) The project would require an additional $70,000 immediately to install new solar heating elements. c) The solar heating elements design requires that all the old gas oven-heating parts be kept intact. d) The life of the ovens is exactly ten years, after which the company can then choose to install new gas ovens or new nuclear ovens. Both technologies have the same life expectancy. Gas and solar ovens have the same scrap value. e) Fuel and maintenance on solar ovens will be $20,000 less per year than fuel and maintenance on gas ovens. f) At the end of the tenth year, the spent solar batteries must be disposed of as toxic waste, at a cost of $30,000. g) Straight-line depreciation is applied over ten years with a salvage value of $0. h) The tax rate is 30%. i) CMCP management uses 12% as a hurdle rate for all its new projects. [i] Should the project be undertaken? [Answer: NPV = +$14,207] Exercise 2: Cambridge Mushroom Cloud Pizzeria You have been retained by Cambridge Mushroom Cloud Pizzeria (CMCP) to investigate the financial impact of a proposed project to convert their pizza ovens to run on solar energy: a) They tell you that $100,000 have already been spent on designing the prototype solar-powered oven. b) The project would require an additional $70,000 immediately to install new solar heating elements. c) The solar heating elements design requires that all the old gas oven-heating parts be kept intact. d) The life of the ovens is exactly ten years, after which the company can then choose to install new gas ovens or new nuclear ovens. Both technologies have the same life expectancy. Gas and solar ovens have the same scrap value. e) Fuel and maintenance on solar ovens will be $20,000 less per year than fuel and maintenance on gas ovens. f) At the end of the tenth year, the spent solar batteries must be disposed of as toxic waste, at a cost of $30,000. g) Straight-line depreciation is applied over ten years with a salvage value of $0. h) The tax rate is 30%. i) CMCP management uses 12% as a hurdle rate for all its new projects. [i] Should the project be undertaken? [Answer: NPV = +$14,207]