Spencer D. Pogue
Investing in a Brewpub: A Capital Budgeting Analysis 1. Estimate Estimate the Operation Operational al Cash Flows for the brewpub brewpub project project.. Use the “best case an “worse! case scenarios.! "o o this# $ou will nee to calculate the annual re%enues an annual e&penses for the 1'($ear project# an$ changes in net wor)ing capital# an an$ changes to capital e&penitures. e&penitur es. Describe all assumptions an calculations $ou use to arri%e at the *nal free cash +ows. "his case stu$ shoul ha%e been set up as a pro(forma pro(forma income statement. First First the onetime cost are not a onetime cash outla$ b$ the owners. ,emember# ,emember# the$ will be ta)ing out a loan for the onetime cost. "han the brewpub e-uipment e-uipment an construction cost shoul be epreciate. "he onetime license fee an web esign shoul be amortie. "he interest on the loan loan shoul be inclue as an e&pense. Once $ou calculate /et 0ncome then $ou a bac) epreciation to get to operating cash +ow.
*See Spreadsheets attached . Calculate the /P2 an 0,, of the project p roject gi%en the information information presente using the “best case scenario.! Shoul Samantha an 3rant go ahea with the brewpub in%estment4 5h$ or wh$ not4
NPV = $!"#!%& I'' = #( Net present value is p)sitive! eaning the cash )ut+)ws ,)r this pr)-ect is less less than the cash in+)ws. in+)ws. /he re0uired rate rate ), return 1c)st ), capital2 is 3( and the I'' ,)r this pr)-ect is #(! )re than the re0uire rate rate ), return. 4rant and Saantha Saantha sh)uld pr)ceed pr)ceed with the pr)-ect. Using the operating the operating cash +ow $ou calculate /P2 using an 67 iscount rate. From rate. From that $ou calculate 0,,. 0,, shoul be aroun 87
9. 5hat woul be the impact on /P2 an 0,, if the “worst case scenario! occurs4 5oul this alter 3rant an Samantha:s ecision whether to in%est in the brewpub4 Describe how $ou foun this result ;also show in the spreasheet<.
In the w)rst case scenari) I ad-usted the annual revenue d)wn ,r) $5%"!33 16bbl s)ld2 t) $"%5! 1#bbl s)ld2. /his ade the variable e7penses increase 1wages8salaries2 there,)re ad-usting the NPV d)wn t) $#"!59 and I'' d)wn t) &6(. /hey still sh)uld pr)ceed with the pr)-ect since NPV is p)sitive and I'' is greater than the re0uired rate ), return ), 3(. "he worse case shoul prouce an 0,, below the cost of capital. 8. Suppose the$ are operating uner the best case scenario an the$ ecie that in $ear = the$ woul li)e to o major reno%ations to the restaurant ;a capital e&pense<. "he$ *gure this will cost an aitional >1#'''#''' in $ear =. ?long with the reno%ations# the$ *gure the$ coul increase the price of the beer to >@ per pint an )eep it at that price for the uration of the project. Aow o these changes impact /P2 an 0,,4 0s it worth it for the pair to go forwar with the reno%ations4 Describe how $ou foun this result ;also show in the spreasheet<.
I ad-usted the annual revenues in year # t) $%6&!5 t) acc)unt ,)r the $& price increase )n the beer while still eeping the 9( increase each year. I added $;; 1Capital Purchase2 t) acc)unt ,)r the ren)vati)n. In y capital analysis spreadsheet! I ad-usted the year # gr)wth rate percentages t) ad-ust the )perating cash+)w )utputs in y spreadsheet. <)ing a $;; ren)vati)n in year # changes the NPV and I'' draatically. P)stren)vati)n the NPV dr)ps t) $!9& and the I'' dr)ps d)wn t) %.65(. Alth)ugh still p)sitive! 4rant and Saantha w)uld n)t want t) eliinate all ), their pr)>ts ,)r a ren)vati)n that will n)t yield the any returns c)pared t) Preren)vati)n. "he >1B shoul be epreciate# not ta)e as a one time cost. =. 5oul there be a signi*cant impact to Samantha an 3rant:s brewpub ecision if there were a change in the cost of capital4 Describe how $ou foun this result ;also show in the spreasheet<.
Changing the c)st ), capital t) #( and adding an additi)nal >7ed e7pense ), $9! changed the NPV t) 1$5#!5%32 and ade the I'' decrease t) &.%6(. . ?re there an$ other issues that $ou thin) might in+uence the pair:s in%estment ecision4 5hat# if an$thing# ha%e Samantha an 3rant not consiere in their capital bugeting anal$sis4
/hey c)uld try t) >nance the pr)-ect with a l)an instead ), using all e0uity! this way s)e ), the interest ay have ta7 bene>ts .
0 color coe m$ answers to help match the corresponing spreasheets to the answers.
