_The Pennsylvania State University
THE UNIVERSITY OF NEVADA LAS VEGAS
WILLIAM F. HARRAH COLLEGE OF HOSPITALITY
TCA 420.4
Spring 2019
Capital Budgeting Project Part A
INTRODUCTION
This project is the first of a two-part project that assesses the potential benefits of a capital investment. In the first project, you are required to prepare the pro-forma income statements, balance sheets, and statements of retained earnings of a capital investment. In part B of the project (posted later), you are asked to determine whether or not the project is a worthwhile investment. The second part of the project will be based on the results of this part of the project.
DUE DATE
The project will be due on Tuesday, April 2, 2019, at the beginning of class in hard copy form. Projects received after this date will be penalized 15 points each 24-hour period they are late (beginning at the start of class). E-mail submissions will not be accepted.
BACKGROUND
After finally graduating from UNLV with a degree in Hotel Administration, you have decided to go into business with Cosmo Kramer. You are going to help him realize his dream of opening a restaurant where people can make and bake their own pizzas. The restaurant is called Cosmo’s.
REQUIREMENTS
1. All analysis will be completed using Excel. Handwritten statements
alance sheets are unacceptable. Any explanations necessary must be completed in Word.
2. You must have a 5-year income statement, 5-years of balance sheets and a 5-year statement of retained earnings for the project. Each statement should be on one page. This can be done by printing them “landscape” (i.e. sideways) to make sure all 5 years fit onto one page.
3. In addition to the statements, you must print out the formulas you used for the balance sheet and income statements. There is a formulas tab in Excel at the top of the menu. A “show formulas” button is off to the right. The formula printouts are to be handed in with the statements. They do not have to all fit onto one page.
4. You should present your work as follows:
a) Income statement for the project;
b) Formulas for the project’s income statement;
c) Balance sheet for the project;
d) Formulas for the project’s balance sheet;
e) Statement of retained earnings for the project;
f) Formulas for the project’s statement of retained earnings.
5. Average checks should be rounded to the nearest penny. All dollar figures should be rounded to the nearest dollar. Make sure that your income statements and balance sheets are formatted with dollar signs and commas.
6. Staple all of your analysis together so that it won’t get lost or misplaced. Projects that are not clipped or stapled together will lose points.
9. Projects that do not meet these requirements will be penalized.
You can complete this project with one partner.
You are expressly fo
idden to consult anyone else about this project (except the instructor).
***IMPORTANT*** To complete this assignment, you must use the last four digits of your social security number, called your ID. You must also state on the front page which partner’s ID number you are using. If your social security number begins with 0, place them at the end. Example: 0097 becomes 9700.
Initial Investment
You recently purchased an option on a parcel of land. You may purchase the land for its cu
ent market price of ID x 150.
The parcel of land is cu
ently undeveloped; it would require a depreciable investment of ID x 90 in land improvements. Land improvements are items such as paving, cu
ing and lighting. The land improvements are expected to have an economic life of 10 years and no salvage value.
The restaurant will cost ID x 340 (this includes equipment). The building will be depreciated over 40 years and has no salvage value. The cost of equipment is included in the cost of the building.
Thus, the total investment to be financed = Land + Land Improvements + Building.
Net Working Capital Requirements
Net working capital is needed for any hospitality operation. If you are unsure of what net working capital is, feel free to peruse your TCA 321 text or look at Chapter 3 in our 420 text. The following table indicates the net working capital needs and amount of cu
ent liabilities for the project.
Year 1
Years 2-5
Net working capital
$100,000
$200,000
Total Cu
ent Liabilities
$200,000
$300,000
For this project, follow this formula:
Net Working Capital = Other Cu
ent Assets (excluding cash) – Total Cu
ent Liabilities.
Financing Information
Long-term debt to gross fixed
asset ratio
Interest Rate
% of net income paid as dividends
30%
8%
10%
It is important to note that after the initial investment of capital, no new equity capital or long-term debt will be raised. Management will obtain an interest-only loan so the amount of long-term debt will be constant over the 5-year period. All remaining earnings will be put back into the business. No additional investment in fixed assets will be made and all excess funds will be held as cash.
Other Pertinent Information
1. The pro-forma analysis will be for the calendar years XXXXXXXXXX.
2. The corporate income tax rate is 20%.
3. All depreciation will be calculated on a straight-line basis (reminder: land does not depreciate). Straight line depreciation expense = (Cost – Salvage Value) / Life.
4. Your balance sheet should include the following accounts: cash, other cu
ent assets, total cu
ent assets, land, building, land improvements, gross fixed assets, accumulated depreciation, net fixed assets, total assets, cu
ent liabilities, long term debt, total liabilities, common stock, retained earnings, total equity, and total liabilities and owner’s equity.
Demand Forecast
1. The restaurant will have its grand opening on January 1, 2020 and be open 365 days per year. All years will have 365 days (no leap years).
2. The restaurant is expected to serve 400 customers each day in the first year of operation. After year one, it expects the number of customers to increase at a compound annual rate of 3%.
3. The average food check in the first year is $ XXXXXXXXXXThe average check is expected to increase at a compound annual rate of 4%. The average check is for FOOD ONLY!
4. Beverage revenue is expected to be 25 percent of food revenue each year.
5. Other income is expected to be $10,000 in the first year and increase at a compound annual rate of 4%. This should not be included in total revenue. See the sample restaurant income statement in Chapter 3 of the textbook.
Expense Forecast
Cost of Sales
Amount in Year 1
Amounts in Years 2-5*
Food Cost
32% of food revenue
32% of food revenue each yea
Beverage Cost
20% of beverage revenue
20% of beverage revenue each yea
Controllable Expenses
Amount in Year 1
Amounts in Years 2-5*
Salaries, Wages, Benefits
31% of total revenue
30% of total revenue each yea
Direct Operating Expenses
2% of total revenue
3% of total revenue each yea
Marketing
4% of total revenue
3% compounded annually
Maintenance
4% of total revenue
4% of total revenue each yea
Energy
3% of total revenue
3% of total revenue each yea
Occupation Costs
Amount in Year 1
Amounts in Years 2-5*
Real Estate Taxes
2% of total revenue
2% of total revenue each yea
Property Insurance
1% of total revenue
1% of total revenue
Interest
(Long-term debt) x int. rate
Same as Year 1
Depreciation
Straight-line calculation
Same as Year 1
Income Taxes
(Income before income tax) x tax rate
(Income before income tax) x tax rate
*PLEASE NOTE THE FOLLOWING:
(1) Do not increase the percentage of revenue during the forecast; this means that the dollar amount of the expense increases after the first year.
(2)“Compounded annually” means that if the increase is 4 percent, for example, then each year’s expense is 4 percent larger than the previous year’s expense.
HELPFUL HINTS
This is a relatively complicated, realistic capital budgeting exercise. It is intended to integrate the material learned in class. Submissions are expected to resemble those presented to an upper level manager in a hospitality operation. Make sure they are legible and presented in good order. YOU MUST FASTEN YOUR PROJECT TOGETHER!
With regard to the balance sheet, deviations from the accounts previously listed will only serve to confuse you. And remember, it isn’t a balance sheet if it doesn’t balance.
One of the main lessons of the exercise is to understand how the balance sheet relates to the income statement. It is recommended that you work with them simultaneously rather than trying to complete each one separately. Good luck!!
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