from the deteriorating equipment. Each pound of roasted coffee can be sold at $3.25 per pound (either to 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. Mr. Donovan 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. Mr. Donovan 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, so he wants you to evaluate the return on investment in that period using the investment criteria of payback period, NPV, and IRR. The following table will help in the calculations of the tax shield for the new equipment: CA Recipe Machine and qu a ntidades for Tax Shield Formula: Assume no salvage value when calculating the tax shield, and that the half-year rule applies for Class 43. The tax rate Mr. Donovan wants you to utilize is 25%. When calculating the tax shield, the present value should be in the same period as the initial investment (Year O), which also means that deprecation (i.e., CCA) should not be taken from the cash flows in subsequent years since their tax shelter effects are already accounted for in the tax shield Redevelopment of Coffee Shops Mr. Donovan 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, OCH 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 S36,000 each. Mr. Donovan wants you to evaluate the profitability of this investment after a seven-year period using the investment criteria of NPV. Investment Proposals for Ontario Coffee Home Investment Proposals Jerry Donovan, CEO of OCH, wants you to evaluate two investment proposals that the company is considering: s. The purchase of a coffee roaster plant in Cuba. The re-development of coffee shops to accommodate the selling of frozen yogurt. Mr. Donovan reminds you that only relevant costs and revenues should be considered. "Relevant costs have to be occurring in the future," explained Mr. Donovan. "And have to differ from the status quo. For example, if we choose to buy the roaster plant, it is only the incremental revenue and costs related to the purchase that should be considered. We also need to take into account the opportunity cost associated with the alternatives." More details on each investment proposal are included below. Mr. Donovan wants you to recommend if OCH should invest in one, both, or none of the investment proposals. Required Return Mr. Donovan wants you to use 7% as the discount rate (.e., the required return) Investment in Roasted Coffee Plant Mr. Donovan is considering purchasing a coffee plant in Cuba where labour is cheap and there are proximal coffee farms to help lower transportation costs. The acquisition price of the plant is S6M, which includes roasting equipment that originally cost SI4M when it was purchased 8 years ago. Some of the equipment is on its last legs, so an additional S2M of equipment has to be purchased. The roaster plant currently has S2M 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 cach 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. Transportation variable costs (gas, variable overhead, etc.) are estimated to be 12% of revenue, and include transportation of raw materials to the roaster and finished products to the port for delivery to OCH coffeehouses. The roasted coffee plant is expected to produce 1.1M pounds from the deteriorating equipment. Each pound of roasted coffee can be sold at $3.25 per pound (either to 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. Mr. Donovan 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. Mr. Donovan 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, so he wants you to evaluate the return on investment in that period using the investment criteria of payback period, NPV, and IRR. The following table will help in the calculations of the tax shield for the new equipment: CA Recipe Machine and qu a ntidades for Tax Shield Formula: Assume no salvage value when calculating the tax shield, and that the half-year rule applies for Class 43. The tax rate Mr. Donovan wants you to utilize is 25%. When calculating the tax shield, the present value should be in the same period as the initial investment (Year O), which also means that deprecation (i.e., CCA) should not be taken from the cash flows in subsequent years since their tax shelter effects are already accounted for in the tax shield Redevelopment of Coffee Shops Mr. Donovan 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, OCH 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 S36,000 each. Mr. Donovan wants you to evaluate the profitability of this investment after a seven-year period using the investment criteria of NPV. Investment Proposals for Ontario Coffee Home Investment Proposals Jerry Donovan, CEO of OCH, wants you to evaluate two investment proposals that the company is considering: s. The purchase of a coffee roaster plant in Cuba. The re-development of coffee shops to accommodate the selling of frozen yogurt. Mr. Donovan reminds you that only relevant costs and revenues should be considered. "Relevant costs have to be occurring in the future," explained Mr. Donovan. "And have to differ from the status quo. For example, if we choose to buy the roaster plant, it is only the incremental revenue and costs related to the purchase that should be considered. We also need to take into account the opportunity cost associated with the alternatives." More details on each investment proposal are included below. Mr. Donovan wants you to recommend if OCH should invest in one, both, or none of the investment proposals. Required Return Mr. Donovan wants you to use 7% as the discount rate (.e., the required return) Investment in Roasted Coffee Plant Mr. Donovan is considering purchasing a coffee plant in Cuba where labour is cheap and there are proximal coffee farms to help lower transportation costs. The acquisition price of the plant is S6M, which includes roasting equipment that originally cost SI4M when it was purchased 8 years ago. Some of the equipment is on its last legs, so an additional S2M of equipment has to be purchased. The roaster plant currently has S2M 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 cach 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. Transportation variable costs (gas, variable overhead, etc.) are estimated to be 12% of revenue, and include transportation of raw materials to the roaster and finished products to the port for delivery to OCH coffeehouses. The roasted coffee plant is expected to produce 1.1M pounds