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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.
You are asked to complete
questions 1. and 2. as follows:
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.
o
Create
a depreciation schedule
Additional information:
CASE
SUMMARY
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 concern.
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.
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