Module 2 Assignment: Project Analysis Caffeine Blaster Beverage Company, Inc. manufactures and distributes a variety of soft drinks including sodas and juices. They are considering expanding the business, but are unsure if they are better to expand through the purchase of another company, or by adding to their current product lines. The finance department as been asked to investigate these options from a financial analysis perspective. Two companies have been identified for purchase, along with the most favorable areas for expansion into new product lines. Your supervisor has provided you with information on the purchase and projections for both potential companies for purchase, along with the information on the two new beverage lines - seltzer and ice teas (data below). To help gain a better understanding of each option, you have been asked to provide the following data for each of the 4 projects: Calculate the minimum payback period Calculate the NPV of projected cash flows Calculate the Internal Rate of Return (IRR) The company assumes a discount rate of 6% for all projects, and wants the shortest payback period possible while maximizing profits. Once you have calculated the data for each potential project, you are asked to make a recommendation to the CFO based on your findings. This will be used to make a suggestion to the company leadership on how Caffeine Blaster Beverage Company, Inc. should proceed for their expansion. In a 1-2 paragraph explanation, address the following (in the spreadsheet or a separate word processing document): Identify your top suggested project. Explain why you are making this recommendation, referencing your calculations and what this data could mean for the future of your company. Identify the lowest project in your priority list. Explain why this project should be eliminated and NOT pursued. Reference your calculations and why this project is not a good idea. Write ups should be professional and follow all rules of grammar/spelling and APA. They should not exceed one page in length. Data for each of the projects is outlined below. Use the template for your calculations. One tab per project has been created to help keep all data together and consistent for each project. Expansion Project Title Project Description and Details Purchase of Snappal Beverage Company Purchase of PolarBear Seltzer Company Development of Coffee Line Development of Straight Caffine This would be a total acquisition of Snappal Beverage Company. This company manufactures a line of ice teas of various flavors and has a reputation of using the best materials on Earth for making their drinks. It is an established company, with owners looking to retire. They are willing to provide part time consulting for up to one year to anyone who buys the company This company is based in Massachusetts and distributes their flavored seltzers nationally. While they have a large, loyal customer following, the company has exchanged hands multiple times. The current owners want out of the business, but it is uncertain as to why this is the case. The company is undervalued and the sale price reflects this. Research and development has been asking that the company develop a line of coffees for several years. This initial project would launch several varieties: a regular, a regular decaf, and three flavors. It would require a large investment by the company to include facility space, equipment, staff, etc. The first year would be a building/launching year, so cash flow would be minimal. However, the growth rate would be huge. This project is another brain child of the research and development team. It extracts the caffine that is naturally found in coffee and concentrates it into a liquid, squirtable additive that can be used in any drink. R&D has been using variations of this liquid caffine to increase department productivity. Since it already exists, investment would be minimal. Project Cost (Initial Investment) First Year Cash Flow Annual Growth Rate (5 Expenses as a years) percentage of Revenues $25,000,000 $8,500,000 8% 28% $15,000,000 $8,500,250 3.25% 54% $45,500,000 $13,000,000 12% 34.00% $6,500,000 $2,500,000 4% 32% Project Option 1: Purchase Snappal Beverage Co. Expansion Project Title Purchase of Snappal Beverage Company Calculation of Minimum Payback Period: Project Description and Details Project Cost (Initial First Year Cash Annual Expenses as a Payback NPV IRR Flow Growth Rate Investment) |(5 years) percentage of Period Revenues $8,500,000 8% 28% This would be a total acquisition of $25,000,000 Snappal Beverage Company. This company manufactures a line of ice teas of various flavors and has a reputation of using the best materials on Earth for making their drinks. It is an established company, with owners looking to retire. They are willing to provide part time consulting for up to one year to anyone who buys the company. 2.941176471 Years NPV of Projected Cash Flows Projected Revenues at annual growth rate Projected Expenses at 28% of Revenue Annual Cash Flows Discount rate for each year (6%) Present value of cash flows NPV of Projected Cash Flows Internal Rate of Return (IRR): Year 0 Cash Flow Year 1 Cash Flow Year 2 Cash Year 3 Cash Year 4 Cash Year 5 Cash -$25,000,000 $8,500,000 Flow $9,180,000 Flow $9,914,400 Flow $10,707,552 Flow $11,564,156 0 $2,380,000 $2,570,400 $2,776,032 $2,998,115 $3,237,964 -$25,000,000 $6,120,000 $6,609,600 $7,138,368 $7,709,437 $8,326,192 0.000 0.943 -$25,000,000 $5,773,608 0.890 $5,882,544 0.840 $5,993,374 0.792 $6,106,645 0.747 $6,222,164 $4,978,335 13%