Only questions 3 and 4, continued from answers to 1&2 that are included on the attachments.
Pilgrim
Coffee Inc. is a successful chain of coffee shops that offers handcrafted
coffee and espresso drinks using outsourced coffee beans. In their quest to
deliver the best cup of coffee around, top management has learned a lot about
coffee beans from around the world and are considering the task of roasting
their own coffee beans in house at their flagship cafe. They believe they can
wholesale their roasted coffee beans to other coffee shops, both local and afar
and offer their packaged beans to customers in-house as well use the beans for
their own drink creations. The COO is worried about the potentially high costs
involved and would like to use your finance knowledge to evaluate the new
venture and address their concerns.
For
your Module 5 Portfolio Milestone and using the additional information to be
found in Module 8 Portfolio Project, you are asked to complete questions 3. and
4. as follows:
3.
What is the after-tax salvage value of
the equipment?
4.
What is the projected net income and
Operating Cash Flows (OCF) for the three years?
o Complete an income statement for each year.
You
will include these answers in your completed final portfolio project.
CASE OVERVIEW
The main equipment required is a commercial coffee bean roaster.
Management has their eyes set on a vintage commercial roasting machine which
costs $180,000. The shipping and installation cost of the machine is
$40,000. The roasting machine will be depreciated under the MACRS system
using the applicable depreciation rates which are 33%, 45%, 15%, and 7%
respectively. Production is estimated to last for three years, and the
company will exit the market before intense competition sets in and erodes
profits. The market value of the coffee bean roaster is expected to be $120,000
after three years. Net working capital of $5,000 is required at the start,
which will be recovered at the end of the project. The coffee beans will be
packaged in 12 oz. containers that sell for $22.00 each. The company expects to
sell 20,000 units per year; cost of goods sold is expected to total 70% of
dollar sales.
Weighted Average Cost
of Capital (WACC):
Pilgrim’s common stock is currently listed at $45 per share; new
preferred stock sells for $50 per share and pays a dividend of $2.50. Last
year, the company paid dividends of $1.50 per share for common stock, which is
expected to grow at a constant rate of 10%. The local bank is willing to
finance the project at 12.5% annual interest. The company’s marginal tax rate
is 35%, and the optimum target capital structure is:
Common equity 50%
Preferred
20%
Debt
30%
Your main task is to compute and evaluate the cash flows using
capital budgeting techniques, analyze the results, and present your
recommendations whether the company should take on the project.
QUESTIONS
To help in the analysis, answer all the following questions as
an accompaniment to your report to the owners. Present the analysis in one
Excel file with the data, computations, formulas, and solutions. It is preferred
that the Excel file be embedded inside the WORD document.
1. What is the total investment amount at the
start of the project (i.e., year zero cash flow)?
2. Prepare a depreciation schedule to show the
amount of depreciation for each year.
3. What is the after-tax salvage value of the
equipment?
4. What is the projected net income and Operating
Cash Flows (OCF) for the three years?
o
Complete
an income statement for each year.
Last Completed Projects
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