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 formula that you used, the sources you wish to cite, and your answers to the questions listed in the assignment guidelines. (extremely important)!!!!!!
Individual Project Rubric
| Grading Criteria | Percentage |
| Deliverable requirements addressed; understanding of material and writer’s message and intent are clear. | 40% |
| Calculation methods, where required, are contextually appropriate, fully explained, and presented in a manner that is easy to understand. | 10% |
| External research incorporated in the paper, if any, supports the writer’s position and is properly acknowledged, and cited direct quotations may not exceed 10% of the word count of the body of the assignment deliverable (excluding title page, abstract, table of contents, tables, exhibits, appendices, and reference pages). Inclusion of plagiarized content will not be tolerated and may result in adverse academic consequences. | 5% |
| Critical thinking: Position is well-justified, there is logical flow, and there are examples. | 20% |
| Structure: Includes introduction and conclusion, proper paragraph format, and reads as a polished, academic paper or professional presentation, as appropriate for the required assignment deliverable. | 10% |
| Mechanical: No spelling, grammatical, or punctuation errors. | 10% |
| APA: Deliverable is cited properly according to the APA Publication Manual (6th ed.). | 5% |