Ceylon Coffee Vendors PLC Ceylon Coffee Vendors PLC is a company that installs and supplies coffee vending machines in offices, schools and at petrol stations. They were the first coffee vending machine company to sell fair trade coffee. and they have a brand image on ethical activities. However, sales have been declining for many years as many consumers have switched to purchasing better quality coffee from the growing number of coffee shop chains. The marketing director, Mr. Thomas, has been investigating the market for disposable coffee cups that are fully recyclable as the contribution made by the manufacturing industry growing and trading to environmental and social issues. The cups are manufactured from a combination of paper and coated in Polylactic Acid-Based plastic to make them waterproof. He believes that this would allow Ceylon Coffee Vendors PLC to sell to the big coffee shop chains, to exploit the benefits from the growth in this market. The initial cost of the expansion will be Rs. 3.3 million with a residual value of Rs. 0.05 million at the end of the fifth year. The initial cost of expansion will be paid in three (03) equal installments at the end of the current year, year 1 and year 3. The refurbishment cost at the end of the fifth year is Rs. 0.5 million. Thomas forecasted to produce 200, 000 cups per annum over the next five (05) years. The annual sales of coffee cups as a percentage of planned production are expected to be as follows: Year Sales (%) 1 25 2 50 3 70 4 80 5 100. The coffee cups are produced in the year of sale. The selling price per cup will be Rs. 50 in the first year and the price will be annually increased by 10% based on the previous year's selling price. The variable costs of production will be Rs. 30 per cup in the first year and the cost will be increased annually by 10% based on the previous year's variable cost. The company must spend Rs. 800,000 and Rs. 720,000 as fixed costs during the first and second years of operations and thereafter Rs. 500,000 per annum during the next three years. Initial working capital of Rs. 800,000 will be required in the current year and additional working capital of Rs. 200,000 will be required in year 2. The company has a nominal after-tax cost of capital of 5% per annum. Lilly Patel, Chief Executive, is interested in Thomas’s proposal but advised that the investment will need to be paid back within 3 years and have a net present value of at least Rs. 9 million. Required: a) Calculate the Net Present Value of the proposed investment at Ceylon Coffee Vendors PLC and comment on its financial acceptability. b) Do you believe that Lily Patel will approve Thomas’s Proposal? Show necessary calculations and give reasons for your answer. c) In addition to the analysis in requirement (b), what non-financial factors would you consider in deciding on the proposal? d) Calculate the minimum cost of capital at which the proposed system will be financially viable, assuming all other factors remain constant. Explain your answer.
Ceylon Coffee Vendors PLC
Ceylon Coffee Vendors PLC is a company that installs and supplies coffee vending machines in offices, schools and at petrol stations. They were the first coffee vending machine company to sell fair trade coffee. and they have a brand image on ethical activities. However, sales have been declining for many years as many consumers have switched to purchasing better quality coffee from the growing number of coffee shop chains. The marketing director, Mr. Thomas, has been investigating the market for disposable coffee cups that are fully recyclable as the contribution made by the manufacturing industry growing and trading to environmental and social issues. The cups are manufactured from a combination of paper and coated in Polylactic Acid-Based plastic to make them waterproof. He believes that this would allow Ceylon Coffee Vendors PLC to sell to the big coffee shop chains, to exploit the benefits from the growth in this market. The initial cost of the expansion will be Rs. 3.3 million with a residual value of Rs. 0.05 million at the end of the fifth year. The initial cost of expansion will be paid in three (03) equal installments at the end of the current year, year 1 and year 3. The refurbishment cost at the end of the fifth year is Rs. 0.5 million. Thomas forecasted to produce 200, 000 cups per annum over the next five (05) years. The annual sales of coffee cups as a percentage of planned production are expected to be as follows:
Year Sales (%)
1 25
2 50
3 70
4 80
5 100.
The coffee cups are produced in the year of sale. The selling price per cup will be Rs. 50 in the first year and the price will be annually increased by 10% based on the previous year's selling price. The variable costs of production will be Rs. 30 per cup in the first year and the cost will be increased annually by 10% based on the previous year's variable cost.
The company must spend Rs. 800,000 and Rs. 720,000 as fixed costs during the first and second years of operations and thereafter Rs. 500,000 per annum during the next three years. Initial working capital of Rs. 800,000 will be required in the current year and additional working capital of Rs. 200,000 will be required in year 2. The company has a nominal after-tax cost of capital of 5% per annum. Lilly Patel, Chief Executive, is interested in Thomas’s proposal but advised that the investment will need to be paid back within 3 years and have a
Required:
a) Calculate the Net Present Value of the proposed investment at Ceylon Coffee Vendors PLC and comment on its financial acceptability.
b) Do you believe that Lily Patel will approve Thomas’s Proposal? Show necessary calculations and give reasons for your answer.
c) In addition to the analysis in requirement (b), what non-financial factors would you consider in deciding on the proposal?
d) Calculate the minimum cost of capital at which the proposed system will be financially viable, assuming all other factors remain constant. Explain your answer.
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