Blue Moon Coffee 8 . Co, is considering opening a new store. The project requites an uplrant. investment of $8,300.000 and is assumed to have a usefut life of four years. The salvage value ot total investment at the end of the 4 th year is estimated at $300,000. The company uses straight-line depreciation. Additionally, the following information is estimated: - The company faces a marginal tax rate of 20%. - Part of the operating assets are expected to be sold for $500.000 at the end of the 4 th year. - The new store will need to maintain the working capital balance as follows: $200,000 at the beginning of the 1 st year and $300,000 at the end of 15t. 2 nd, and 3rd years. The remaining balance will then be recovered at the end of the 4 th year. - The new store is expected to sell 2 million cups of coffee each year for the four years of the project's life. The average unit price of coffee products is $3.0 per cup. - The average unit cost is estimated at $1.0 per cup, including materials, labor, and supplies. You are the analyst of the firm and are asked to answer questions a), b), and c) below. a) [10 marks] To conduct the project's cash flow analysis, calculate the following 3 items: i) depreciation expense per year; ii) cash flow from the asset sales, net of tax, at the end of the 4 th year; and iii) changes in working capital requirements for each year, including "year 0 ". "For full credit, you must show the steps/calculation toward your results. project's life. The average unit price of coffee products is 33.0 per cup - The average unit cost is estimated at $1.0 per cup, including materiats, tabor, and supplies. You are the analyst of the firm and are asked to answer questions a), b), and c) below. a) [10 marks] To conduct the project's cast flow analysis, calculate the following 3 items: i) depreciation expense per year; ii) cash flow from the asset sales. net of tax, at the end of the 4 th year; and iii) changes in working capital requirements for each year, including " year 0. - For full credit, you must show the steps/calculation toward your results. b) [10 marks] Calculate unlevered cash flows for each year and find the project's net present value (NPV) assuming the cost of capital is 12%. *For full credit, you must show the steps/calculation toward your results. c) [10 marks] Suppose Blue Moon CFO has realized that two importan pietces of intermation are missing in the prior analysis. The company owns the commercial property where is plans to open the new store. Therefore, instead of using the space for the new store, Alue Moon could make a rent income of 5250.000 per year guaranteed for the next four years. Additionally. neay. its new store's Iocation. Blue Moon has another store, which seils 1.4 million cups of coffee each year. Thesale price and cost per unit are the same as the estimates provided above. However. the CFO believes that once the new store is launched, the existing store's annual sales volume is expected to decline to 1.3 million cupsi per year for the next four years. Recall that the discount rate for the project is 12%. Determine the present value of total additional costs, net of tax that should be included in the company's analysis. *For full credit, you must show the steps/calculation toward your results
