Wildcat Pizza, Inc. would like to open a new restaurant in Boston. The initial investment to purchase the building is $420,000, and an additional $50,000 in working capital is required. Since this store will be operating for many years, the working capital will not be returned in the near future. Wildcat expects to remodel the store at the end of 3 years at a cost of $100,000. Annual net cash receipts from daily operations (cash receipts minus cash payments) are expected to be as follows: Year 1 $80,000 Year 2 $115,000 Year 3 $118,000 Year 4 $140,000 Year 5 $155,000 Year 6 $167,000 Year 7 $175,000 The company’s required rate of return is 13 percent. Assume management decided to limit the analysis to 7 years. Find the net present value of this investment. Use trial and error to approximate the internal rate of return for this investment proposal. Based on your answer to requirements a and b, should Wildcat Pizza, open the new store? Explain. Calculate the payback period (include working capital in the initial investment). Assuming management requires all investments to be recovered within three years, should Wildcat Pizza open the new store? What is the weakness of using the payback period method to evaluate long-term investments? Assume the manager of the company wanted to live in Boston and intentionally inflated the projected annual cash receipts so that the proposal would be accepted. The proposal would otherwise have been rejected. Explain how the company’s use of a post audit would help to prevent this type of unethical behavior.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 21P

See similar textbooks

Related questions

Question

Wildcat Pizza, Inc. would like to open a new restaurant in Boston. The initial investment to purchase the building is $420,000, and an additional $50,000 in working capital is required. Since this store will be operating for many years, the working capital will not be returned in the near future.

Wildcat expects to remodel the store at the end of 3 years at a cost of $100,000. Annual net cash receipts from daily operations (cash receipts minus cash payments) are expected to be as follows:

Year 1	$80,000
Year 2	$115,000
Year 3	$118,000
Year 4	$140,000
Year 5	$155,000
Year 6	$167,000
Year 7	$175,000

The company’s required rate of return is 13 percent. Assume management decided to limit the analysis to 7 years.

Find the net present value of this investment.
Use trial and error to approximate the internal rate of return for this investment proposal.
Based on your answer to requirements a and b, should Wildcat Pizza, open the new store? Explain.
Calculate the payback period (include working capital in the initial investment). Assuming management requires all investments to be recovered within three years, should Wildcat Pizza open the new store?
What is the weakness of using the payback period method to evaluate long-term investments?
Assume the manager of the company wanted to live in Boston and intentionally inflated the projected annual cash receipts so that the proposal would be accepted. The proposal would otherwise have been rejected. Explain how the company’s use of a post audit would help to prevent this type of unethical behavior.

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 4 steps with 5 images

SEE SOLUTION Check out a sample Q&A here

Follow-up Questions

Read through expert solutions to related follow-up questions below.

Follow-up Question

Wildcat expects to remodel the store at the end of 3 years at a cost of $100,000. Annual net cash receipts from daily operations (cash receipts minus cash payments) are expected to be as follows:

Year 1	$80,000
Year 2	$115,000
Year 3	$118,000
Year 4	$140,000
Year 5	$155,000
Year 6	$167,000
Year 7	$175,000

The company’s required rate of return is 13 percent. Assume management decided to limit the analysis to 7 years.

Calculate the payback period (include working capital in the initial investment). Assuming management requires all investments to be recovered within three years, should Wildcat Pizza open the new store?
What is the weakness of using the payback period method to evaluate long-term investments?
Assume the manager of the company wanted to live in Boston and intentionally inflated the projected annual cash receipts so that the proposal would be accepted. The proposal would otherwise have been rejected. Explain how the company’s use of a post audit would help to prevent this type of unethical behavior.

Solution

by Bartleby Expert

SEE SOLUTION

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.