Describe how the proposal below will decrease the risk of the company (Chipotle).

Proposal

This proposal provides a convenient and easy meal-time solution. This option offers customers the ability to purchase a customized D.I.Y. food kit with a great selection of ingredients. Chipotle’s research and development expenses for D.I.Y. food kits will be estimated at $4.6M, which may require a team of 20 experts and some additional resources. Initial promotion and updates to the menu would cost $1.79M, $500 promotion package cost x 2,580 stores = $1,290,000, and $500,000 in updates to menu and digital media overseen by a multimedia company. The new supply network will require $3M, $1M in additional supply and $2M in packaging, for the initial acquisition of kit materials. The D.I.Y kits do not require additional ovens, freezers, or food processing equipment. Employee training investment of $309K will include training to promote and sell the new product. The breakdown consists of 6 employees per store x $20 per hour x 1 hrs x 2,580 locations in the United States. Product sampling of $2M consists of providing an initial set of sample kits to 2,580 stores to get customers' interest and boost product promotion. Working capital needs will be at 7% from year to year. Working capital initial incremental investment will be $3.5M and gradually grow over eight years. Total acquisition stage cash outflow will be $15M. In the operating stage, the revenues are estimated at 0.01 percent of Chipotle's last year’s total revenue of $5.5B and equate to $55.8M. This estimate is close to selling 2,165 kits per store at a price of $10 per kit. As an additional option on the menu, it will provide steady growth of revenues at 0.02 percent for upcoming years, with a decline back down to 0.01 percent in years six through eight. At that point, Chipotle may expand the sale of the kit and complimentary items to retail stores to bring that number back up. The lost sales of the old menu item are estimated based on the outlook that only 1/10 of the customer would prefer the new product to the old. Yearly loss of existing sales will be at $5M. The new and existing products will have mostly variable costs associated with them, estimated at 60%. Fixed costs related to the introduction of the new product will be estimated at $500,000 for the years two through five and then be reduced down to $250,000 when sales begin to decline. These fixed costs cover the additional space allocated for the new product at the warehouse and distribution center. The tax rate is estimated at 28% for all eight years. Overall, Chipotle’s after-tax cash flow increases from $14M to $16M over the eight years.
In conclusion, the D.I.Y. kit project is expected to continue past year eight. Its continuing value will be estimated at $81M, calculated by taking the eighth year after-tax income and multiplying it by 5. Overall, the negative cash flow is expected in year 0 because of initial investment expenses in the acquisition stage. During the operating stage, the project will move into a positive cash flow cycle with steady growth. Chipotle has the potential to keep the product in its repertoire with expansion possibilities in the retail market.