Throwdown! With Bobby Flay, Inc.

Restaurant Expansion Analysis

Chapter 12 Comprehensive Capital Budgeting Decision Project
Project is considered the Final Exam and is due Wednesday, April 27, 2016 at the end of the
day submitted to a D2L drop box. No projects will be accepted late. Project must be
submitted using a color PowerPoint presentation to support your position on what
Throwdown! With Bobby Flay, Inc. should do. You can also use excel spreadsheets to
paste into the PowerPoint showing Payback method, Net Present Value method, 5 year cash
flow schedule, Internal Rate of Return and Modified Internal Rate of Return calculations.
Rank the proposals in order of preference. IRR should be calculated by calculator or
excel. The type of PowerPoint presentation is up to you. It should be professional, creative,
personalized and CREATED ONLY BY YOU. ANYONE caught copying a project from
any source will be given an F for the course. This is your opportunity to create a document
that you can use as a template at your current or future employer. The project should
include:

1. Cover page

2. Introduction Summary of Investment opportunities that will be analyzed

3. Supporting documentation showing your calculations for payback, net present

value, cash flow statements, Internal Rate of Return and MIRR. This could be a
summary page of each individual investment analyzed or contain all supporting
documentation.

4. Note risks and opportunities associated with each investment. These could be
noted from the text below or researched by you and included in the report.

5. Conclusion – give your recommendation to the management team.

6. Attach appendix back up where appropriate.

Investment Opportunities
Payback, Net present value, Cash Flow spreadsheet, internal rate of return and Modified
Internal Rate of Return methods Throwdown! With Bobby Flay, Inc., led by CEO and
Celebrity Chef Bobby Flay and his management team are looking to expand their Restaurant
empire in the United States. They are looking at buying iconic restaurant(s) and capitalizing on
the Bobby Flay celebrity chef name to increase revenue. Three landmark restaurants have been
identified to the management team. The locations are in New York City, New Orleans and
Denver. Bobby Flay would like you to evaluate these three potential capital investments for
them. While all three eateries present Flay with a unique opportunity in the marketplace it
serves, the capital budget has been limited to $25 million due to a fear of over expanding beyond
their internal restaurant infrastructure. CEO Bobby Flay has hired you to do the Capital
Budgeting analysis on the three ionic restaurant opportunities below. All projects must exceed
Flay’s cost of capital. Flay requires a five-year outlook on their investments. Flay expects a
thorough analysis with a solid recommendation on what Throwdown!, With Bobby Flay, Inc.
should do. There has been an increasing demand for excellent high end food. Flay fancies
himself as the world’s premier chef. He is now on a mission to add one or two famous United
States restaurants to his empire. “I am rich, arrogant, a great chef and good looking. There is
money to be made!”

1. 21 Club located at 21 West 52nd Street, New York City, NY – Flay management is
excited about investing in this awesome restaurant. It is an American Icon of the
famous and wealthy! Heck, their list of guests includes Gerald/Betty Ford, Richard
Nixon, Bill Clinton, George/Barbara Bush, Donald Trump, George Clooney, Barbara
Walters, Jerry Jones, Frank Sinatra, and numerous other rich and famous people! This
eatery opened on January 1, 1930 and has been going strong since. It survived
Prohibition as a popular speakeasy with its disappearing bar and secret wine cellar to
hide the illegal liquor from the Feds. Flay estimates achieving a 30% Gross Profit
Margin after subtracting his cost of food and beverages. With the economy growing and
Manhattan being chic right now, high end food restaurant demand is rising. However,
CEO Flay, cautions that this might not be sustainable as new restaurants are popping up
everywhere and customers are all about being trendy in New York. He forecasts Year 1
guest count at 132,000. He is also confident that he can achieve a Year 1 average guest
check of $121. The 2016 Earnings Before Depreciation and Taxes are forecast at 25%
of Revenue each year. He projects that in Years 2 – 5 he can increase his EBDT by 6%
a year by increasing guest count and average guest check. Flay will negotiate a
purchase price of $11.5M to be taken over 15 years MACRS. CEO Bobby Flay is
excited about this trend setting Manhattan eatery!

2. Commander’s Palace located at 1403 Washington Avenue, New Orleans, LA – Flay

management is excited about investing in this renown Victorian turquoise restaurant.
This is the Big Easy’s premier first class restaurant. This historic and beautiful Creole
cooking establishment opened in the Garden District in 1880, 133 years ago!
Legendary Chefs Paul Prudhomme, Emeril Lagasse and Tory McPhail have all honed
their culinary skills here. The chef’s motto is “dirt to plate within 100 miles”. All their
fish, meats, fruits and produce come from local harvesters. Not to mention the 25 cent
martinis served at lunch. Flay estimates achieving a 35% Gross Profit Margin after
subtracting his cost of food and beverages. With the tourist rebirth after the Hurricane
Katrina clean up, Louisiana style Creole cooking is popular with the New Orleans party
goers. However, CEO Flay, cautions that getting flood insurance is impossible in New
Orleans. Another hurricane could destroy the Commander. There is risk. He forecasts
Year 1 guest count at 146,000. He is also confident that he can achieve a Year 1
average guest check of $83. The 2016 Earnings Before Depreciation and Taxes are
forecast at 30% of Revenue each year. He projects that in Years 2 – 5 he can increase
his EBDT by 7% a year by increasing guest count and average guest check. Flay will
negotiate a purchase price of $10.450M to be taken over 15 years MACRS. CEO
Bobby Flay is excited about this “Nawleans” architectural landmark!

3. Buckhorn Exchange located at 1000 Osage Street, Denver, CO – Flay management

is excited about investing in this restaurant housed within a National Historic Landmark
building and Western Museum. It is Denver’s original steakhouse and is the proud
owner of Colorado’s Liquor License Number 1. With an Old West menu of prime-
grade steak, buffalo, elk, salmon, quail, game hen, baby back ribs, and their signature
Rocky Mountain Oysters ordered with horseradish – what’s not to love! Their
 prestige’s list of presidential guests includes Teddy Roosevelt, Franklin D. Roosevelt,
Dwight Eisenhower, Jimmy Carter, and Ronald Reagan. This oasis is celebrating their
120th year, having opened in 1893 and has been a success from the beginning. The
museum has many historic Old West artifacts, including General George Custer’s
military saber that was lost in the Battle of Little Big Horn. In 1938, Sitting Bull's
nephew, Chief Red Cloud, and a delegation of thirty Sioux and Blackfoot Indians rode
slowly down Osage Street in full battle regalia, and ceremoniously turned Custer’s
saber over to Shorty Scout Zietz the owner of the Buckhorn Exchange. Flay estimates
achieving a 35% Gross Profit Margin after subtracting his cost of food and beverages.
With Denver and Colorado in general growing, demand for high quality restaurants is
on the upswing. However, CEO Flay, cautions that economic growth has slowed and
this is a very old building with limited options to upgrade due to it’s historic
designation. He forecasts Year 1 guest count at 125,000. He is also confident that he
can achieve a Year 1 average guest check of $76. The 2016 Earnings Before
Depreciation and Taxes are forecast at 33% of Revenue each year. He projects that in
Years 2 – 5 he can increase his EBDT by 5% a year by increasing guest count and
average guest check. Flay will negotiate a purchase price of $8.7M to be taken over 15
years MACRS. CEO Bobby Flay is excited about the Wild West location!

Flay wants to know which restaurant(s) they should be investing in for the long-term. They
have asked you to analyze the three business opportunities identified above. Marketing has
adjusted the sales revenue projections for each of the three alternatives presented above to
account for risk.

The Earnings Before Depreciation and Taxes (EBDT) are projected as follows:

21 Club Commander’s Buckhorn Exchange

Year EBDT EBDT EBDT

1............ $ $ $
2............
3............
4............
5............

Depreciation Expenses are projected as follows:

21 Club Commander’s Buckhorn Exchange

Year Deprec. Deprec. Deprec.

1............ $ $ $
2............
3............
4............
5............
Tips for presentation:

A. Calculate and present the Cash flow spreadsheet, Net Present Value, Internal Rate of
Return, MIRR and payback method calculations for evaluating each investment.
Each investment scenario should have its’ own PowerPoint slide.

B. Show one slide that summarizes each:

Commander’s Buckhorn
21 Club Palace Exchange

Payback Period:

Net Present Value:

Internal Rate of Return

Modified Internal Rate of Return

C. Show one slide with your recommendation, noting potential opportunities and risks.
Be clear on your recommendation with written supporting analysis.