Investment Proposals for Orio Coffee House Daniel Jackson, CEO of OCH, has approached you to work on 2 investment proposals that the company is considering: 1. Buying coffee roaster plant in Mexico. 2. The Reconstruction of coffee shops to add the selling of yogurt. Mr. Daniel reminds you to consider only relevant expense and income. “Relevant costs have to be occurring in the future,”He said. “And have to be unique from the status quo. For example, if we choose to buy the roaster plant, it is only the incremental revenue and costs related to the purchase that should be considered. We also need to take into account the opportunity cost associated with the alternatives.” More details on both of investment proposal is written below. Mr. Daniel wants you to recommend after evaluation, if OCH should invest in one, both, or none of the investment proposals. Required Return Mr. Daniel wants you to use 7% as the discount rate (i.e., the required return). First Proposal of Investment in Roasted Coffee Plant Mr. Daniel is considering investing in a coffee plant in Mexico where you can get cheap labor and there are proximal coffee farms that can decrease transportation costs. The cost of acquisition of the plant is $7Million, which covers roasting equipment that originally cost $14Million when it was purchased 8 years ago. Some of the equipment is obsolete and need to be discarded, so an additional $2Million of equipment has to be purchased. The roaster plant currently has $2Million of available tax shield left, excluding any tax shield related to the equipment to be purchased. The raw materials and direct labour used for manufacturing these products are 8% and 7% of sales, respectively. The processing costs for roasting are approximately 17% of total sales. All of these costs as a percentage of sales are expected to remain constant over the time horizon. The plant also needs2 managers with fixed salaries of $50,000 each per year. Insurance cost for the plant and equipment is $40,000 per year. Additional incremental production overhead costs (property taxes, maintenance, security, etc.) excluding depreciation are estimated as $75000 yearly. Wages are expected to rise with inflation (estimated to be 2%) over the time period, while other fixed costs are expected to remain steady. Transportation related variable costs (gas, variable overhead, etc.) are estimated to be 12% of revenue, and include transportation of raw materials to the roaster and finished products to the port for delivery to OCH coffeehouses. The roasted coffee plant is expected to produce 1.1M pounds of coffee for the first two years, with production dipping by 100,000 pounds per year after this due to lower productivity from the deteriorating equipment. Each pound of roasted coffee can be sold at $3.25 per pound (either to retail cafes, franchise cafes, or to wholesale partners), with the price expected to rise with inflation over time. Each pound of coffee can make 30 cups of coffee that can sell at an average retail price of $4.00 per cup. Mr. Daniel has stressed that the profitability of the plant base has to be looked at on a stand-alone basis, i.e., from the sales from the plant to buyers, not from retail cafés to customers. Mr. Daniel wants to evaluate if project will be profitable after5 years, as significant reinvestment will be needed after five years to keep the plant operational, so he wants you to evaluate the return on investment in that period using the investment criteria of payback period, NPV, and IRR. The following table will help in the calculations of the tax shield for the new equipment: Class CCA Rate Description 43 30% Machine and equipment to manufacture and process goods for sale Tax Shield Formula: Assume no salvage value when calculating the tax shield, and that the half-year rule applies for Class 43. The tax rate Mr. Daniel wants you to utilize is 25%. When calculating the tax shield, the present value should be in the same period as the initial investment (Year 0), which also means that deprecation (i.e., CCA) should not be taken from the cash flows in subsequent years since their tax shelter effects are already accounted for in the tax shield. Reconstruction of Coffee Shops to add yogurt services- IT IS IN THE IMAGE BELOW Requirements are in the image below! I need the excel file for the whole solution.
Investment Proposals for Orio Coffee House
Daniel Jackson, CEO of OCH, has approached you to work on 2 investment proposals that the company is considering:
Mr. Daniel reminds you to consider only relevant expense and income. “Relevant costs have to be occurring in the future,”He said. “And have to be unique from the status quo. For example, if we choose to buy the roaster plant, it is only the incremental revenue and costs related to the purchase that should be considered. We also need to take into account the
More details on both of investment proposal is written below. Mr. Daniel wants you to recommend after evaluation, if OCH should invest in one, both, or none of the investment proposals.
Required Return
Mr. Daniel wants you to use 7% as the discount rate (i.e., the required return).
First Proposal of Investment in Roasted Coffee Plant
Mr. Daniel is considering investing in a coffee plant in Mexico where you can get cheap labor and there are proximal coffee farms that can decrease transportation costs.
The cost of acquisition of the plant is $7Million, which covers roasting equipment that originally cost $14Million when it was purchased 8 years ago. Some of the equipment is obsolete and need to be discarded, so an additional $2Million of equipment has to be purchased. The roaster plant currently has $2Million of available tax shield left, excluding any tax shield related to the equipment to be purchased.
The raw materials and direct labour used for manufacturing these products are 8% and 7% of sales, respectively. The
Additional incremental production overhead costs (property taxes, maintenance, security, etc.) excluding
Transportation related variable costs (gas, variable overhead, etc.) are estimated to be 12% of revenue, and include transportation of raw materials to the roaster and finished products to the port for delivery to OCH coffeehouses.
The roasted coffee plant is expected to produce 1.1M pounds of coffee for the first two years, with production dipping by 100,000 pounds per year after this due to lower productivity from the deteriorating equipment. Each pound of roasted coffee can be sold at $3.25 per pound (either to retail cafes, franchise cafes, or to wholesale partners), with the price expected to rise with inflation over time. Each pound of coffee can make 30 cups of coffee that can sell at an average retail price of $4.00 per cup. Mr. Daniel has stressed that the profitability of the plant base has to be looked at on a stand-alone basis, i.e., from the sales from the plant to buyers, not from retail cafés to customers.
Mr. Daniel wants to evaluate if project will be profitable after5 years, as significant reinvestment will be needed after five years to keep the plant operational, so he wants you to evaluate the return on investment in that period using the investment criteria of payback period, NPV, and
|
Class |
CCA Rate |
Description |
|
43 |
30% |
Machine and equipment to manufacture and process goods for sale |
Tax Shield Formula:
Assume no salvage value when calculating the tax shield, and that the half-year rule applies for Class 43. The tax rate Mr. Daniel wants you to utilize is 25%. When calculating the tax shield, the present value should be in the same period as the initial investment (Year 0), which also means that deprecation (i.e., CCA) should not be taken from the cash flows in subsequent years since their tax shelter effects are already accounted for in the tax shield.
Reconstruction of Coffee Shops to add yogurt services- IT IS IN THE IMAGE BELOW
Requirements are in the image below!
I need the excel file for the whole solution.
Step by step
Solved in 2 steps with 2 images
