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 assignment, you need to develop a capital budget. It is important to know what the café 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 above:
- Prepare 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 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.
- Assume the company has a P/B (payback) policy of not accepting projects with a life of over 3 years. Do you think the project should be accepted? Why?
Your submitted assignment must include the following:
- A double-spaced, 2-page Word document that contains answers to the 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.