Application Case
Coffee Shop is a company dedicated to the commercialization of "signature coffee", a category of high quality coffee that is grown, processed and prepared with a high degree of attention and care on the part of the producer (the coffee maker). This coffee undergoes high quality processing, which is fundamental to the final flavor and possesses unique notes and aromas that reflect its growing and processing conditions.
The company is considering opening a branch in the Metropolitan Region and for this it estimates an initial investment of 30,000,000 pesos. It also expects sales to reach $80,000,000 pesos by 2024, with a 10% compound increase over the next two years. Therefore, by 2025 they will be $88,000,000 and by 2026, $96,800,000.
Based on this sales forecast, the following pro forma income statement was developed (expressed in thousands of Chilean pesos):
 

	2024	2025	2026
Sales revenue	$       80.000	$      88.000	$      96.800
Cost of sales	-$       45.000	-$      49.500	-$     54.450
GROSS PROFIT	$        35.000	$       38.500	$      42.350
Operating expenses	-$        10.000	-$        11.000	-$     12.000
UTILIDAD ANTES DE INTERESES E IMPUESTOS (UAII)	$        25.000	$      27.500	$      30.350
Gastos financieros	-$        1.000	-$        1.100	-$        1.245
EARNINGS BEFORE INTEREST AND TAXES	$       24.000	$     26.400	$       29.105
Taxes  (20%)	-$       4.800	-$        5.280	-$       5.821
NET INCOME	$        19.200	$        21.120	$     23.284

 

Cost of sales includes: inventory acquisition costs and direct labor salary payments. The latter are equal to 10% of sales revenue for each year.
Assume that all sales and purchases from suppliers are made 100% cash.

 

Application
a. Proforma Statements (20 points)

- Following the information in the Income Statement, the Cash Flow Statement is requested to be prepared for all projection years (20 points).

b. Leverage (40 points)

- It is requested to determine the Accounting Operating Break-even Point for each year (20 points).
- Calculate the degree of operating leverage, degree of financial leverage and degree of total leverage per year and analyze the results (20 points).

c. Evaluation of the investment project (40 points)

- Determine the discount rate of the project. Assume that the required rate of return on equity (i.e. the rate obtained by the CAPM model) is 10% and the market interest rate is 9.5% per annum. In turn, the equity ratio is 40% and the debt ratio is 60% (10 points).
- Determine the NPV (10 points).
- Determine the IRR (10 points).
- Determine the Payback (10 points).
Analyze the results obtained.