$$Empowering Coffee$$ Case Study

Maria Kilina, $2023.$

$$What an amazing concept!$$ said Angela Boss to Daniele Majore, a friend they went to a

culinary school together. Daniele approached her because he wanted to partner for a coffee

shop he was going to open in Kitsilano, Vancouver BC$.$ The coffee shop had an original concept

with motivating quotes on the walls and the cups, and names of the drinks such as $$Your

today$$s success$,$I$$m proud of you$,$Unlocked potential$$ etc. Angela looked at Daniele and

said: $$We both are experienced in culinary, but we have no finance and even business

background. How do we understand if this business makes sense?$$I think I have someone in

mind who can help us$.$ Daniele meant you and the next day he called you to retain you as a

consultant who would help evaluate this business project.

Here is the data you and Daniele have managed to collect so far. Daniele and Angela are going

to own the coffee shop for $5$ years and then convert it into a clothing store $($they think it would

be more entertaining than to do the same thing for more than $5$ years$).$ The equipment $($coffee

machine etc.$)$ would cost $$100,000,$ will be good for $5$ years, and after $5$ years will need to be

demolished and replaced since will no longer produce high$-$quality coffee. Some time will be

required to attract customers and gain market share among Kitsilano coffee shops. Sales during

the first year are planned to be $100$ cups of coffee per day at average with $20\%$ increase each

year for $2$nd and $3$rd years and $10\%$ increase for $4$th and $5$th year. Since the coffee is going to be of

premium quality and the concept is unique, Daniele assumes that the customers are going to be

willing to pay $$6/$cup at average $($considering a variety of drinks from $$2$ to $$9).$ They also plan

to sell around $30$ sandwiches$/$day at an average price of $$9/$sandwich$.$ The coffee shop will be

open Monday$-$Sunday from $7$am till $3$pm$.$ Daniele decided to ignore inflation and consider it

within the opportunity cost.

You and Daniele estimated that variable costs will be about $30\%$ of the price. The coffee shop

will require $2$ baristas and $2$ customer service specialists. You did some research on salaries in

Vancouver and came up with $$18/$hr$.$ The owners will be expecting $1$ barista and $1$ customer

service specialist to be working in the coffee shop at a time.

The rent is of the space that is considered is $$7,000/$month$.$

$$Empowering Coffee$$ will need to spend $$20,000$ on marketing $$ promotions, testing

campaigns, collaboration with influencers.

Daniele is going to negotiate with suppliers as well so that the amount of accounts payable is

equal to $20\%$ of costs of good sold. The business will need an inventory of cups, coffee, milk etc.

which is an estimated $$15,000$ before the start and needs to be maintained during the

$1$

FNCE $623$

production years. The inventory and accounts payable will be fully reclaimed at the end of the $5$

years $($AP will be paid, and inventory sold back to the suppliers$).$

You defined that an alternative investment of similar risk would bring a return of $20\%.$ The

income tax for a small business like that would be $26\%.$

Your report to the founders should contemplate the following questions and problems:

$1.$ NPV and IRR analysis. Explain what they mean for the founders and how they impact

their decision.

$2.$ Analysis using other project evaluation criteria that you learned from the textbook

$($payback$,$ discounted payback, profitability index, degree of operating leverage$)$ and

explain what they mean in terms of this project, and how it will influence your decision.

$3.$ Find $2$ major$/$significant drivers of NPV and conduct a scenario analysis of this project

based on those $2$ parameters $($you only need to result in NPV and IRR for the analysis,

you do not need to look at other project evaluation criteria here$).$

$4.$ If you look at all your analysis above, what will your final recommendation and major

considerations be$?$ What risks would you recommend Daniele and Angela pay special

attention to$?$Empowering Coffee$$ Case Study

Maria Kilina, $2023.$

$$What an amazing concept!$$ said Angela Boss to Daniele Majore, a friend they went to a

culinary school together. Daniele approached her because he wanted to partner for a coffee

shop he was going to open in Kitsilano, Vancouver BC$.$ The coffee shop had an original concept

with motivating quotes on the walls and the cups, and names of the drinks such as $$Your

today$$s success$,$I$$m proud of you$,$Unlocked potential$$ etc. Angela looked at Daniele and

said: $$We both are experienced in culinary, but we have no finance and even business

background. How do we understand if this business makes sense?$$I think I have someone in

mind who can help us$.$ Daniele meant you and the next day he called you to retain you as a

consultant who would help evaluate this business project.

Here is the data you and Daniele have managed to collect so far. Daniele and Angela are going

to own the coffee shop for $5$ years and then convert it into a clothing store $($they think it would

be more entertaining than to do the same thing for more than $5$ years$).$ The equipment $($coffee

machine etc.$)$ would cost $$100,000,$ will be good for $5$ years, and after $5$ years will need to be

demolished and replaced since will no longer produce high$-$quality coffee. Some time will be

required to attract customers and gain market share among Kitsilano coffee shops. Sales during

the first year are planned to be $100$ cups of coffee per day at average with $20\%$ increase each

year for $2$nd and $3$rd years and $10\%$ increase for $4$th and $5$th year. Since the coffee is going to be of

premium quality and the concept is unique, Daniele assumes that the customers are going to be

willing to pay $$6/$cup at average $($considering a variety of drinks from $$2$ to $$9).$ They also plan

to sell around $30$ sandwiches$/$day at an average price of $$9/$sandwich$.$ The coffee shop will be

open Monday$-$Sunday from $7$am till $3$pm$.$ Daniele decided to ignore inflation and consider it

within the opportunity cost.

You and Daniele estimated that variable costs will be about $30\%$ of the price. The coffee shop

will require $2$ baristas and $2$ customer service specialists. You did some research on salaries in

Vancouver and came up with $$18/$hr$.$ The owners will be expecting $1$ barista and $1$ customer

service specialist to be working in the coffee shop at a time.

The rent is of the space that is considered is $$7,000/$month$.$

$$Empowering Coffee$$ will need to spend $$20,000$ on marketing $$ promotions, testing

campaigns, collaboration with influencers.

Daniele is going to negotiate with suppliers as well so that the amount of accounts payable is

equal to $20\%$ of costs of good sold. The business will need an inventory of cups, coffee, milk etc.

which is an estimated $$15,000$ before the start and needs to be maintained during the

$1$

FNCE $623$

production years. The inventory and accounts payable will be fully reclaimed at the end of the $5$

years $($AP will be paid, and inventory sold back to the suppliers$).$

You defined that an alternative investment of similar risk would bring a return of $20\%.$ The

income tax for a small business like that would be $26\%.$

Your report to the founders should contemplate the following questions and problems:

$1.$ NPV and IRR analysis. Explain what they mean for the founders and how they impact

their decision.

$2.$ Analysis using other project evaluation criteria that you learned from the textbook

$($payback$,$ discounted payback, profitability index, degree of operating leverage$)$ and

explain what they mean in terms of this project, and how it will influence your decision.

$3.$ Find $2$ major$/$significant drivers of NPV and conduct a scenario analysis of this project

based on those $2$ parameters $($you only need to result in NPV and IRR for the analysis,

you do not need to look at other project evaluation criteria here$).$

$4.$ If you look at all your analysis above, what will your final recommendation and major

considerations be$?$ What risks would you recommend Daniele and Angela pay special

attention to$?$