Use the Standard & Poor's Market Insight Web site (www.mhhe.com/ edumarketinsight) for this problem. Assume that Starbucks contem- plates selling music online over a Web site, via existing wireless hotspots in its stores. The estimated initial investment in technology and cost of implementation is $69 million, and the expected net in- crease in annual after-tax cash flow is $7 million in the first year, grow- ing 2 percent a year in perpetuity. Management estimates that this project carries moderately more risk than Starbucks' average project, and believes that the project's risk is roughly comparable to that faced on typical investments made by Apple Computer Inc.

a. Calculate the appropriate discount rate to evaluate this project. You may assume that Starbucks correctly chose the comparable.com- pany, and that differences in leverage between Starbucks and Apple have a negligible effect on the analysis. Assume a 35 percent tax rate, 10 percent interest rate on Apple's debt, and other informa- tion as presented in Problem 11, above. (Use Apple's financial statements for September 30, 2007.)

b. Based on management's projections, should Starbucks invest in this enhancement?

c. What would be the consequences of Starbucks using its WACC (computed in Problem 11) to evaluate this project?

d. Based on your answers to the preceding questions, what advice would you give Starbucks' management?AppendixLO1