4. Capital Budgeting (10 pts.) A local restaurant is trying to decide whether or

Question

4. Capital Budgeting (10 pts.) A local restaurant is trying to decide whether or not to offer delivery service. If they do, sales are expected to increase but delivery vehicles will need to be purchased along with the hiring of additional staff. Using the expected cash flows outlined in the table below, help them to analyze this decision Show vour work. SPPV Factors ,-10% Time NATCF -30,000 6,000 8,000 PV 4 10,000 10,000 i. Calculate the NPV of this project using a discount rate of 10% and enter it in the box below. Show your work using the table above and space provided below. ii. Based on the NPV you found in part i at a 10% discount rate, what can you say about the Internal Rate of Return (IRR) for this investment project? Note: you do not need to calculate an exact value for the IRR.

Explanation / Answer

Time NATCF SPPV FACTORS R =10% PV 0 -30000 1.00 -30,000.00 1 6000 0.91 5,454.55 2 8000 0.83 6,611.57 3 8000 0.75 6,010.52 4 10000 0.68 6,830.13 5 10000 0.62 6,209.21 SPCC factors are calculated using the formula (1/(1+r)^n, where n is the nth period PV is calculated by multiplying respective factors with the NATCF i NPV 1,115.98 ii Since NPV is positive IRR will be more than 10%, which is used to calculate NPV

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