Problem
As the financial management consultant to Wildcat Pizza, you will complete a detailed analysis of the three capital projects that Wildcat Pizza is considering and present a report with your recommendations to the business management.
After the calculations have been completed, using your knowledge of capital analysis, prepare a 1-2-page memorandum to the business management. Your memorandum will include your assessment of the financial measures for each project. Be sure to explain what the numbers mean to a layperson. Be sure to share the importance of the metrics for decision-making, remember you are the financial consulting expert, you need to explain this to a business owner with expertise in running a pizza restaurant. Additionally, include whether Wildcat Pizza has sufficient financial and management resources for the project. If not, what cost of financing options do the owners have so that they may engage in the selected capital project. You can recommend more than one project, if it is financially appropriate. Your recommendation must include both the quantitative (financial measures from above) and the qualitative (descriptive based on your understanding of the business) rationale for your decision.
When writing the memo:
Be sure your memorandum to the CEO is written as a financial consultant to explain the financial measures that you have calculated, in a manner that will assist a business owner with the important capital decisions they face. Explain what calculations you used, what they mean, and why they influenced your recommendation on each project. Remember you may recommend more than one project if the data indicates it is financially appropriate.
Also, when making your recommendation include the cost of capital because as a financial consultant it is not just about whether your clients should engage in a particular project, but how will they pay for it given their existing resources? The section below is at the bottom of the case study reading and included here for reinforcement:
Cost of Finance:
Wildcat Pizza has a corporate cost of capital of 9% which will be used to evaluate both the Menu Expansion Project and the Geographic Expansion Project because of their similarities with existing WP operations. The Pizza Oven Manufacturing Facility Project cost of capital will be 12% to reflect higher project risk due to WP's lack of experience in the new industry.
The policy of Wildcat Pizza is to fund all growth with retained earnings and debt only. There is no public equity as the owners of WP wish to maintain control over the business. They have $75,000 in reserve available for funding these projects.