A quaint but well-established coffee shop, the Hot New Cafe,
wants to build a new cafe for increased capacity. 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
$100,000 a year. The cost of the building for the new cafe will be
a total of $750,000, which will be depreciated straight line over
the next 5 years. The firm's marginal tax rate is 37%, and its cost
of capital is 12%.
For this assignment, you need to develop a capital budget. It is
important to know what the cafe managers should consider within
their capital budget. You must also define the key terms necessary
to understand capital budgeting. In this assignment, please show
all work, including formulae and calculations used to arrive at
financial values. You must answer the following:
Using the information in the assignment description: Prepare a
capital budget for the Hot New Cafe 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 your P/B and NPV calculations: Do you
think the project should be accepted? Why? Define and describe Net
Present Value (NPV) as it pertains to the new cafe. Define payback
period. Assume the company has a P/B (payback) policy of not
accepting projects with life of over 3 years. Do you think the
project should be accepted? Why? Your submitted assignment must
include the following:
A double-spaced, two-page Word document that contains answers to
the word questions. You must include a Microsoft Excel spreadsheet
for your calculations. Either the Word document or the Excel
spreadsheet must have all of your calculation values, your complete
calculations, any formulae that you used, the sources you wish to
cite, and your answers to the questions listed in the assignment
guidelines
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