Cuppa Chat Cuppa Chat are cafs and intentionally located in large business parks. Cuppa Chat cafs are very successful as they attract multiple customers who

Cuppa Chat Cuppa Chat are cafés and intentionally located in large business parks. Cuppa Chat cafés are very successful as they attract multiple customers who are employees of the surrounding entities in the respective business parks. Feast’s management is considering introducing a new product line available for sale in these Cuppa Chat cafés. This will however require a total initial investment of R4 140 000 to acquire the required assets and other expenses to launch this product line. Due to the initial curiosity and excitement from customers, it is estimated that Cuppa Chat cafés will generate R380 500 cash profit just after launching the product line. By the end of the first year, this cash profit is expected to have decreased by 14.2%, but it is estimated to increase again with 10.9% at the end of the following year. 

The cash profit for the third year is expected to be 19.5% of the cash profit generated at the launch of the product line before decreasing with 1.7% in the following year. At the end of four years, Cuppa Chat cafés will withdraw this product line as it would wish to introduce a new product line to the market to retain market interest in Cuppa Cafés. Due to this, Cuppa Chat cafés will then sell the machinery that was purchased specifically for this product line, as the cafés will no longer be using them. The total market price for all these second-hand machinery at that time, will be R198 000.

A cost of capital of 12.15%.

Advise Feast Ltd whether Cuppa Chat cafés should proceed with launching the new product line by calculating the net present value of the new product line. (15 marks)