Reference no: EM132655765

Question - A quaint but well-established coffee shop, the Hot New Café, wants to build a new café for increased capacity. Consider the following financial aspects of this endeavor:

Expected sales are $800,000 for the first 5 years.

Direct costs, including labor and materials, will be 50% of sales.

Indirect costs are estimated at $200,000 a year.

The cost of the building for the new café will be a total of $850,000, which will be depreciated straight line over the next 5 years.

The firm's marginal tax rate is 38%, and its cost of capital is 10%.

For this endeavor, I need to develop a capital budget. It is important to know what the café managers should consider within their capital budget. I must also define the key terms necessary to understand capital budgeting. In this endeavor, they need to see all the work, including formulae and calculations used to arrive at financial values.

You must show the following using the information above:

Compose a capital budget for the Hot New Café with the net cash flows for this project over a 5-year period.

Calculate the payback period (P/B) and the net present value (NPV) for the project.

Answer the following questions based on the P/B and NPV calculations:

Should the project be accepted? Why?

Define and describe net present value (NPV) as it pertains to the new cafe.

Assume the company has a P/B (payback) policy of not accepting projects with a life of over 3 years. Should the project be accepted? Why?