Perform a scenario analysis creating a best case and a worst case in addition to the base case The managers give you the following information The chief marketing officer (CMO) estimates that they will sell 3,000 units a year for 5 years at a price of $195 each If people really like the concept of brewing their own frappuccinos and lattes she estimates that they will sell 5,000 units a year and can charge $225 per unit She estimates that there is a 30 chance of this If people do not want the bother of brewing their own and do not worry about going inside the Starbucks, then she estimates they will only sell 1,000 units and can only sell them for $175 each She estimates there is a 20 chance of this happening The chief operations officer (COO) estimates that the variable costs to build these will be 75 of revenue If they can get the higher volumes, then he estimates the cost to be only 70 But with the really low volumes the cost will be 80 The chief financial officer (CFO) says the company will use the MACRS 3 year class for depreciation He estimates that the assembly line will have salvage value of $25,000 However, he notes that worst case there may be nothing to salvage and best case they could find a buyer willing to pay $35,000 He notes that Starbucks tax rate is 24 and that the normal WACC is 7 2 He notes that the WACC could be as high as 8 (worst case) and as low as 6 9 (best case) QUESTION 27 Use the data and instructions from part 3 of the Starbuck's project data What is the NPV in the BEST case scenario A $364,764 54 B $591,482 78 C $1,013,205 33 D $2,786,226 88 QUESTION 28 Use the data and instructions from part 3 of the Starbuck's project data What is the NPV in the WORST case scenario A $379,424 69 B $37,678 36 C $19,996 62 D $21,888 20 QUESTION 29 Use the data and instructions from part 3 of the Starbuck's project data What is the Expected NPV for this project A $3,703 80 B $93,386 95 C $183,804 23 D $303,164 65 QUESTION 30 Use the data and instructions from part 3 of the Starbuck's project data What is the standard deviation of the NPVs of this project A $113,659 10 B $149,960 93 C $353,780 52 D $655,085 56 QUESTION 31 Use the data and instructions from part 3 of the Starbuck's project data What is the coefficient of variation of the NPVs of this project A 77 B 1 98 C 2 16 D 3 79 QUESTION 32 If Starbuck's averages a CoV of 4 5 on their projects, that means that this current project has more risk than normal True False QUESTION 33 By doing this project, Starbucks may take away revenue from Starbuck's brick and mortar stores Should this decrease in revenue be included in the business case NO the business case should stand on its own NO this is a sunk cost YES this is a negative externality YES this is a positive externality QUESTION 34 How could managers use real options to Starbuck's advantage with this project A If this product is not well received by customers , management can decide to abandon the project after one year B If this project does better than expected in year one, management could expand the project to more regions C If this project does better than expected in year one, management could decide to invest further and create additional models D All of these are real options that management has

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Perform a scenario analysis creating a best case and a worst case in addition to the base case. The managers give you the following information.

Perform a scenario analysis creating a best case and a worst case in addition to the base case. The managers give you the following information.

The chief marketing officer (CMO) estimates that they will sell 3,000 units a year for 5 years at a price of $195 each. If people really like the concept of brewing their own frappuccinos and lattes she estimates that they will sell 5,000 units a year and can charge $225 per unit. She estimates that there is a 30% chance of this. If people do not want the bother of brewing their own and do not worry about going inside the Starbucks, then she estimates they will only sell 1,000 units and can only sell them for $175 each. She estimates there is a 20% chance of this happening.

The chief operations officer (COO) estimates that the variable costs to build these will be 75% of revenue. If they can get the higher volumes, then he estimates the cost to be only 70%. But with the really low volumes the cost will be 80%.

The chief financial officer (CFO) says the company will use the MACRS 3 year class for depreciation. He estimates that the assembly line will have salvage value of $25,000. However, he notes that worst case there may be nothing to salvage and best case they could find a buyer willing to pay $35,000. He notes that Starbucks tax rate is 24% and that the normal WACC is 7.2%. He notes that the WACC could be as high as 8% (worst case) and as low as 6.9% (best case).

QUESTION 27

Use the data and instructions from part 3 of the Starbuck's project data.

What is the NPV in the BEST case scenario?

A.
$364,764.54

B.
$591,482.78

C.
$1,013,205.33

D.
$2,786,226.88

QUESTION 28

Use the data and instructions from part 3 of the Starbuck's project data.

What is the NPV in the WORST case scenario?

A.
-$379,424.69

B.
-$37,678.36

C.
-$19,996.62

D.
$21,888.20

QUESTION 29

Use the data and instructions from part 3 of the Starbuck's project data.

What is the Expected NPV for this project?

A.
-$3,703.80

B.
$93,386.95

C.
$183,804.23

D.
$303,164.65

QUESTION 30

Use the data and instructions from part 3 of the Starbuck's project data.

What is the standard deviation of the NPVs of this project?

A.
$113,659.10

B.
$149,960.93

C.
$353,780.52

D.
$655,085.56

QUESTION 31

Use the data and instructions from part 3 of the Starbuck's project data.

What is the coefficient of variation of the NPVs of this project?

A.
.77

B.
1.98

C.
2.16

D.
3.79

QUESTION 32

If Starbuck's averages a CoV of 4.5 on their projects, that means that this current project has more risk than normal.

True

False

QUESTION 33

By doing this project, Starbucks may take away revenue from Starbuck's brick and mortar stores. Should this decrease in revenue be included in the business case?

NO- the business case should stand on its own

NO- this is a sunk cost

YES- this is a negative externality

YES- this is a positive externality

QUESTION 34

How could managers use real options to Starbuck's advantage with this project?

	A.	If this product is not well received by customers , management can decide to abandon the project after one year.
	B.	If this project does better than expected in year one, management could expand the project to more regions.
	C.	If this project does better than expected in year one, management could decide to invest further and create additional models.
	D.	All of these are real options that management has.