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%.
•Using the information in the assignment description: ? Prepare a capital budget for the Hot New Cafe with the net cash f lows 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?