**Please complete on excel if possible. Thanks you in advance. Barbarian Pizza i

Question

**Please complete on excel if possible. Thanks you in advance.

Barbarian Pizza is analyzing the prospect of purchasing an additional fire brick oven. The oven costs $200,000 and would be depreciated (straight-line to a salvage value of $120,000 in 10 years. The extra oven would increase annual revenues by $120,000 and annual operating expenses by $90,000. Barbarian’s marginal tax rate is 25%. This should all be done in excel.

a. What would be the initial, operating, and terminal cash flows generated by the new oven?

b. What is the payback period for the additional oven?

c. Barbarian Pizza’s RRR is 12%. What is the NPV of the additional oven?

d. What is the IRR of the additional oven?

Explanation / Answer

Answer a Amt in ($) Initial Cash Flow       (200,000) Operating Cash Flow per year Incremental Annual Revenue 120000 Incremental Operating Exp. 90000 Depreciation 8000 Income before tax 22000 Tax @ 25% 5500 Net Income 16500 Operating Cash Flow per year 24500 Terminal Cash Flow Cash Flow from salvage 120000 Answer b Payback period Payback period = Intial Investment/ Cash flow per year Payback period = 200000/24500 Payback period = 8.16 years Answer c NPV of the Additional Oven, RRR = 12% Operating Cash Flow per year Incremental Annual Revenue 120000 Incremental Operating Exp. 90000 Depreciation 8000 Income before tax 22000 Tax @ 25% 5500 Net Income 16500 Operating Cash Flow per year 24500 PVIFA 12%, 10 year 5.6502 PV of cash inflow 138430 Salvage Value 120000 PVIF 12%, 10 year 0.322 PV of Salvage 38640 Total PV of Cash Flow 177070 Initial Investment 200000 NPV        (22,930) NPV of the oven will be $ -22930. Answer d IRR of the project year cash flow 0       (200,000) 1 24500 2 24500 3 24500 4 24500 5 24500 6 24500 7 24500 8 24500 9 24500 10 144500 IRR of the Oven 9.7% IRR of the Addition oven will be 9.7%

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