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Coug Coffee is an American coffee product retailer and manufacturer located in Pullman, WA. The company president is Jack Ryan, who inherited the company. When the company was founded over 50 years ago, it originally imported coffee beans from Mexico. The company focused on roasting and retailing coffee beans to more than 30 states in the US. Over the years, the company still maintains its original coffee beans retail business, accounting for about 50 percent of its total revenue. Faced with stiff competition, the company also expanded into the business of manufacturing coffee machines. You, as a Carson College business majored, are hired by the company's finance department to evaluate a new project for the company. As of now, CougCoffee's only coffee maker is named the QuickCofee (QC), and sales have been excellent. CougCoffee's main competitor in the coffee maker market is Stanley Black & Decker, Inc. (SWK). CougCoffee's QC is similar to the SWK's Black & Decker but easier to use. However, CougCoffee wants to introduce a new version of the coffee maker, the CoffeeMaster (CM), into their lineup. CougCoffee spent $300,000 to develop the new CM, 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 $50,000 on a marketing study to determine the new coffee makers expected sales figures. CougCoffee can manufacture the new coffee maker for $55 per machine in variable costs. Fixed costs for the operation are estimated to run $1,500,000 per year. The estimated sales volumes (in units) are 140,000, 160,000, and 100,000 coffee makers per year for the next three years, respectively. The unit price of the new coffee maker will be $95. The necessary equipment can be purchased for $3,000,000 and will be depreciated on a five-year MACRS schedule. It is believed the value of the equipment in three years will be $1,500,000. As previously stated, CougCoffee currently manufactures the QC. Production of the existing product is expecting to be terminated in two years. If CougCoffee does not introduce the new CM product, sales of the existing product will be 100,000 and 90,000 units per year for the next two years, respectively. The price of the existing coffee maker, QC is $75 per coffee maker, with variable costs of $45 each and fixed costs of $900,000 per year. If CougCoffee does introduce the new coffee maker, sales of the existing one will fall by 50,000 (units) coffee makers per year, and the price of the existing coffee maker will have to be lowered to $40 per coffee maker. Net working capital for the new project will be 20 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. CougCoffee has a 20 percent corporate tax rate. The company has a target debt to equity ratio of 0.5 and is currently A rated (according to S&P 500 ratings). The overall cost of capital of CougCoffee is 14 percent. The finance department of the company has asked you to prepare a report to Jack, the company's CEO, and the report should answer the following questions. 4. Given your understanding of CougCoffee and your analyses so far, can you help Jack to make the project decision regarding the company's new product CM? That is, please compute the NPV and IRR of CougCoffee's new project? Please show your computation steps clearly (show your inputs if using financial calculator or excel sheet). Should Jack take the new project? Why or why not (Please explain using the NPV and IRR rules separately)? Coug Coffee is an American coffee product retailer and manufacturer located in Pullman, WA. The company president is Jack Ryan, who inherited the company. When the company was founded over 50 years ago, it originally imported coffee beans from Mexico. The company focused on roasting and retailing coffee beans to more than 30 states in the US. Over the years, the company still maintains its original coffee beans retail business, accounting for about 50 percent of its total revenue. Faced with stiff competition, the company also expanded into the business of manufacturing coffee machines. You, as a Carson College business majored, are hired by the company's finance department to evaluate a new project for the company. As of now, CougCoffee's only coffee maker is named the QuickCofee (QC), and sales have been excellent. CougCoffee's main competitor in the coffee maker market is Stanley Black & Decker, Inc. (SWK). CougCoffee's QC is similar to the SWK's Black & Decker but easier to use. However, CougCoffee wants to introduce a new version of the coffee maker, the CoffeeMaster (CM), into their lineup. CougCoffee spent $300,000 to develop the new CM, 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 $50,000 on a marketing study to determine the new coffee makers expected sales figures. CougCoffee can manufacture the new coffee maker for $55 per machine in variable costs. Fixed costs for the operation are estimated to run $1,500,000 per year. The estimated sales volumes (in units) are 140,000, 160,000, and 100,000 coffee makers per year for the next three years, respectively. The unit price of the new coffee maker will be $95. The necessary equipment can be purchased for $3,000,000 and will be depreciated on a five-year MACRS schedule. It is believed the value of the equipment in three years will be $1,500,000. As previously stated, CougCoffee currently manufactures the QC. Production of the existing product is expecting to be terminated in two years. If CougCoffee does not introduce the new CM product, sales of the existing product will be 100,000 and 90,000 units per year for the next two years, respectively. The price of the existing coffee maker, QC is $75 per coffee maker, with variable costs of $45 each and fixed costs of $900,000 per year. If CougCoffee does introduce the new coffee maker, sales of the existing one will fall by 50,000 (units) coffee makers per year, and the price of the existing coffee maker will have to be lowered to $40 per coffee maker. Net working capital for the new project will be 20 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. CougCoffee has a 20 percent corporate tax rate. The company has a target debt to equity ratio of 0.5 and is currently A rated (according to S&P 500 ratings). The overall cost of capital of CougCoffee is 14 percent. The finance department of the company has asked you to prepare a report to Jack, the company's CEO, and the report should answer the following questions. 4. Given your understanding of CougCoffee and your analyses so far, can you help Jack to make the project decision regarding the company's new product CM? That is, please compute the NPV and IRR of CougCoffee's new project? Please show your computation steps clearly (show your inputs if using financial calculator or excel sheet). Should Jack take the new project? Why or why not (Please explain using the NPV and IRR rules separately)
