Mr. Daniel also ask you to evaluate the potential of developing several hundred stores into new store models with frozen yogurt services. 500 stores have been selected as candidates for development. It will cost $80,000 to convert each store, including modifications to refrigeration equipment, with these costs being capitalized with a 6% applicable CCA rate. The average modified coffee shop is expected to generate an additional $30,000 in after-tax cash flow every year. However, OCH is also estimated to lose about $15,000 in annual after-tax cash flow from these cafés due to yogurt sales cannibalizing existing coffee shops. In other words, some customers who normally would have purchased coffee would instead purchase yogurt. The 500 stores have average annual rent of $36,000 each. Mr. Daniel wants you to evaluate the profitability of this investment after a seven-year period using the investment criteria of NPV. Requirements 1. Identify which revenues and costs are relevant to your analysis, and which costs are irrelevant. Summarize all the information that will be required for each investment proposal, including describing the proposal and identifying the time horizon for each proposal evaluation. 2.Calculate the after-tax cash flows during the life of each of the projects. 3.Utilizing the after-tax cash flows from question 2, evaluate each investment proposal utilizing the following criteria (unless directed otherwise): Payback a. b. NPV 4. Clearly indicate whether any of the above criteria support each of the project proposals, and what the company should ultimately decide to do.
Mr. Daniel also ask you to evaluate the potential of developing several hundred stores into new store models with frozen yogurt services. 500 stores have been selected as candidates for development. It will cost $80,000 to convert each store, including modifications to refrigeration equipment, with these costs being capitalized with a 6% applicable CCA rate. The average modified coffee shop is expected to generate an additional $30,000 in after-tax cash flow every year. However, OCH is also estimated to lose about $15,000 in annual after-tax cash flow from these cafés due to yogurt sales cannibalizing existing coffee shops. In other words, some customers who normally would have purchased coffee would instead purchase yogurt. The 500 stores have average annual rent of $36,000 each. Mr. Daniel wants you to evaluate the profitability of this investment after a seven-year period using the investment criteria of NPV. Requirements 1. Identify which revenues and costs are relevant to your analysis, and which costs are irrelevant. Summarize all the information that will be required for each investment proposal, including describing the proposal and identifying the time horizon for each proposal evaluation. 2.Calculate the after-tax cash flows during the life of each of the projects. 3.Utilizing the after-tax cash flows from question 2, evaluate each investment proposal utilizing the following criteria (unless directed otherwise): Payback a. b. NPV 4. Clearly indicate whether any of the above criteria support each of the project proposals, and what the company should ultimately decide to do.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Transcribed Image Text:6:56
ull
Back
Financecase
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
Mr. Daniel also ask you to evaluate the potential of
developing several hundred stores into new store models with
frozen yogurt services. 500 stores have been selected as
candidates for development. It will cost $80,000 to convert
each store, including modifications to refrigeration equipment,
with these costs being capitalized with a 6% applicable CCA
rate. The average modified coffee shop is expected to generate
an additional $30,000 in after-tax cash flow every year.
However, OCH is also estimated to lose about $15,000 in
annual after-tax cash flow from these cafés due to yogurt sales
cannibalizing existing coffee shops. In other words, some
customers who normally would have purchased coffee would
instead purchase yogurt.
The 500 stores have average annual rent of $36,000 each. Mr.
Daniel wants you to evaluate the profitability of this
investment after a seven-year period using the investment
criteria of NPV.
Requirements
1. Identify which revenues and costs are relevant to your analysis,
and which costs are irrelevant. Summarize all the information
that will be required for each investment proposal, including
describing the proposal and identifying the time horizon for
each proposal evaluation.
2.Calculate the after-tax cash flows during the life of each of
the projects.
3.Utilizing the after-tax cash flows from question 2, evaluate
each investment proposal utilizing the following criteria
(unless directed otherwise):
a. Payback
b. NPV
4. Clearly indicate whether any of the above criteria support
each of the project proposals, and what the company should
ultimately decide to do.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 4 steps with 3 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education