Empowering Coffee Case Study

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 todays success, Im 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 2nd and 3rd years and 10% increase for 4th and 5th 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 7am till 3pm. 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 FNCE 623 2 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?