Calculate the after-tax cash flows during the life of each of the projects. Be sure to identify the total costs of ownership and deduct those costs from the benefits to arrive at the net cash inflow per year. CEO of ACH, wants you to evaluate two investment proposals that the company is considering:

investment 1. The purchase of a coffee roaster plant in Puerto Rico; and

investment 2. The re-development of coffee shops to accommodate the selling of frozen yogurt.

Investment 1 in Roasted Coffee Plant Ms. Matthews is considering purchasing a coffee plant in Puerto Rico, where labour is cheap, and there are proximal coffee farms to help lower transportation costs. The acquisition price of the plant is $6M, which includes roasting equipment that originally cost $14M when it was purchased eight years ago. Some of the equipment is on its last legs, so an additional $2M of equipment has to be purchased. The roaster plant currently has $2M of available tax shield left, excluding any tax shield related to the equipment to be purchased. The direct materials and direct labour used to manufacture these products are 8% and 7% of sales, respectively. The actual roasting processing costs are approximately 17% of sales. These costs, as a percentage of sales, are expected to remain consistent over the time horizon. The plant also requires two managers with fixed salaries of $50,000 each per year. Insurance for the plant and equipment is $40,000 per year. Other incremental manufacturing overhead costs (property taxes, maintenance, security, etc.), excluding depreciation, are estimated to be $75,000 annually. Wages are expected to increase with inflation (estimated to be 2%) over the time period, while other fixed costs are expected to remain steady. Variable transportation costs (gas, truck driver salaries, etc.) are estimated to be 12% of incremental revenue and include transportation of raw materials to the roaster and finished products to the port for delivery to ACH coffeehouses. The roasted coffee plant is expected to produce 1.1M pounds of coffee for the first two years, with production dipping by 100,000 pounds per year after this, due to lower productivity from the deteriorating equipment. Each pound of roasted coffee can be sold at $3.25 per pound (either to ACH retail cafes, franchise cafes, or to wholesale partners), with the price expected to rise with inflation over time. Each pound of coffee can make 30 cups of coffee that can sell at an average retail price of $4.00 per cup. Ms. Matthews has stressed that the profitability of the plant base has to be looked at on a stand-alone basis (i.e., from the sales from the plant to buyers), not from retail cafs to customers. Ms. Matthews wants to see if the project will reach profitability after 5 years, as significant reinvestment will be needed after five years to keep the plant operational. She wants you to evaluate the return on investment in that period using the investment criteria of payback period, discounted payback period, NPV, IRR, and profitability index.

investment 2 Redevelopment of Coffee Shops Ms. Matthews also wants you to evaluate the potential of developing several hundred stores into new store models with frozen yogurt services. Five hundred 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, ACH is also estimated to lose about $15,000 in annual after-tax cash flow from these cafs, due to yogurt sales cannibalizing existing coffee shops. In other words, some customers who normally would have purchased coffee would instead purchase yogurt. The five hundred stores have average annual rent of $36,000 each. Ms. Matthews wants you to evaluate the profitability of this investment after a seven year period, using the investment criteria of NPV and profitability index.