Reference no: EM13858810
Beaver Pizza
Beaver Pizza owns and operates pizza shops and is considering three expansion options, plan A, plan B, and Plan C.
Plan A - Small Shops
Beaver Pizza would open eight (8) small shops for a cost of $8,400,000. The eight shops are expected to generate a net annual cash flow of $1,500,000. The expected life of the shops is 10 years with no expected value at the end of the 10 years.
Each small shop will annually generate $850,000 of revenue with a contribution margin of 70%, fixed COGS of $385,000, and fixed SG&A of $127,500.
Plan B - Large Shops
Beaver Pizza would open three (3) larger shops for a cost of $8,250,000. The three shops are expected to generate a net annual cash flow of $1,080,000. The expected life of the shops is 10 years with an expected residual value of $1,000,000.
Each large shop will annually generate $1,875,000 of revenue with a contribution margin of 64%, fixed COGS of $686,667, and fixed SG&A of $395,000.
Plan C -- Trailers
Beaver Pizza would purchase six (6) fully enclosed pizza trailers and six (6) vans for use at large community events or corporate catering. The trailers cost $85,000 each and the vans cost $48,000 each. Each trailer/van combination is expected to generate a net annual cash flow of $38,000. The expected life of both the trailers and vans is 7 years with an expected residual value of $15,000 per trailer and $12,000 per van.
Each trailer will annually generate $110,000 of revenue with a contribution margin of 75%, fixed COGS of $42,643, and fixed SG&A of $17,000.
Assumptions
Straight-line depreciation
10% annual required rate of return
Compute & Rank
Calculate the following and rank the projects from best to worst for each metric.
-Payback period
-Rate of return
-Net present value
-Profitability index
-Internal rate of return
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