Goodcoffee is an American coffee machine manufacturer located in Irvine, CA. The company president is Jeff Willowbrook, who inherited the company. When the company was founded over 70 years ago, it originally imports coffee beans from Brazil, Colombia, and Mexico and distributes the beans to more than 30 states in the US. Over the years, the company still maintain its main business, which expanded into a chain coffee roster and distributor and accounts for about 50 percent of its total revenue. Faced with stiff competition, the company also expanded into the business of manufacturing coffee machines. You and your team, the Carson College of Business graduates, are hired by the company's finance department to evaluate a new project for the company. One of the major revenue-producing items of Goodcoffee's manufacture division is a coffee maker. Goodcoffee currently has one type of coffee maker, and sales have been excellent. Goodcoffee's main competitor on the coffee maker market is Stanley Black & Decker, Inc. (SWK). Goodcoffee's coffee maker is a unique item in that it comes in a variety of color and is easy to use. However, Goodcoffee wants to incorporate a new design into their products. Goodcoffee spent $750,000 to develop a new technology for its coffee maker that has all the features of the existing coffee maker but adds a new model which can adjust brew temperature according to different types of coffee beans and brews directly into the included 18-ounce thermal mug or into any mug or cup of your choice. The company has spent a further $200,000 for a marketing study to determine the expected sales figures for the new coffee maker. Goodcoffee can manufacture the new coffee maker for $30 each in variable costs. Fixed costs for the operation are estimated to run $1.5 million per year. The estimated sales volume is 155,000, 165,000, 152,500, 135,500, and 130,000 per year for the next five years, respectively. The unit price of the new coffee maker will be $85. The necessary equipment can be purchased for $22 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $6.5 million. As previously stated, Goodcoffee currently manufactures a coffee maker. Production of the existing model is expected to be terminated in two years. If Goodcoffee does not introduce the new coffee maker, sales will be 100,000 units, 98,000 and 86,000 units for the next three years, 2 respectively. The price of the existing coffee maker is $75 per unit, with variable costs of $23 each and fixed costs of $1.8 million per year. If Goodcoffee does introduce the new coffee maker, sales of the existing coffee maker will fall by 6,000 units per year, and the price of the existing units will have to be lowered to $45 each. Net working capital for the coffee makers will be 22 percent of sales and will occur with the timing of the cash flows for the year; for example, there is no initial outlay for NWC, but changes in NWC will first occur in Year 1 with the first year's sales. Goodcoffee has a 21 percent corporate tax rate. The company has a target debt to equity ratio of .5 and is currently A rated (according to S&P 500 ratings). The overall cost of capital of the company is 15 percent. The finance department of the company has asked your team to prepare a report to Jeff, the company's CEO, and the report should answer the following questions.

QUESTIONS

1. Can you and your team prepare the income statement table, the operating cash flow (OCF) table, and the total cash flow from assets (CFFA) table for this project?

2. Can you use these tables to help explain to Jeff the relevant incremental cash flows of this project?

3. Mike, a newly graduated MBA in the company's finance department suggested that you should use 15% as the discount rate for the discounted cash flow (DCF) analysis for this new project. Do you and your team agree with Mike? a) If Yes, can you explain to Jeff, the president of the company, why you should use 15%? b) If Not, please find the cost of capital for this project, and explain in details how your team comes up with this number and why it is proper for this DCF analysis?

4. What are the NPV and IRR of the project?

5. Should Jeff take the new project? Why or why not?