3. After the IPO, Blake and Taylor decide to expand to international markets in Europe. They plan to invest in local farms to source fresh, organic dairy. They narrow down their options to two alternatives: [i] An investment in a Swiss farm would cost $10M today (year 0), $4M next year (year 1) and would increase capacity by 10,000L per year from years 2-9. The variable cost of collecting milk at this location would be $30/liter. Every liter of milk makes 100 cookies. [Hint: nominal annual profits from the increased capacity would therefore be given by 10,000L X (P - $30), where P is the price per 100 cookies] [ii] An investment in a German farm would cost $8M today (year 0), $6M next year (year 1) and would increase capacity by 8,000 L per year from years 2-9. The variable cost of collecting milk at this location would be $25/liter. a. Assume the discount rate is 7% and the selling price of 1 cookie is $1. If Sleepless Brownies can only pursue one of the options, how should the firm choose using NPV as the qualifying metric? b. If the selling price of a cookie is again $1 and the firm's cost of capital is 8%, how should the firm choose using IRR as the qualifying metric? C. If the discount rate is 10%, find the price per cookie where it would make sense to invest in each alternative. That is, find the price at which the NPV is zero for each alternative. [HINT: You can use MS Excel Goal Seek to solve this problem] 3. After the IPO, Blake and Taylor decide to expand to international markets in Europe. They plan to invest in local farms to source fresh, organic dairy. They narrow down their options to two alternatives: [i] An investment in a Swiss farm would cost $10M today (year 0), $4M next year (year 1) and would increase capacity by 10,000L per year from years 2-9. The variable cost of collecting milk at this location would be $30/liter. Every liter of milk makes 100 cookies. [Hint: nominal annual profits from the increased capacity would therefore be given by 10,000L X (P - $30), where P is the price per 100 cookies] [ii] An investment in a German farm would cost $8M today (year 0), $6M next year (year 1) and would increase capacity by 8,000 L per year from years 2-9. The variable cost of collecting milk at this location would be $25/liter. a. Assume the discount rate is 7% and the selling price of 1 cookie is $1. If Sleepless Brownies can only pursue one of the options, how should the firm choose using NPV as the qualifying metric? b. If the selling price of a cookie is again $1 and the firm's cost of capital is 8%, how should the firm choose using IRR as the qualifying metric? C. If the discount rate is 10%, find the price per cookie where it would make sense to invest in each alternative. That is, find the price at which the NPV is zero for each alternative. [HINT: You can use MS Excel Goal Seek to solve this problem]
