QUESTION 3 [ 28] THE COFFEE CLUB celebrates almost three decades of really good food , great service and excellent coffee . It manages 400 stores throughout & countries , with upwards of 40 million dedicated customers . THE COFFEE CLUB has identified Westfield Parramatta and Sunshine Marketplace as two possible locations for a new Wimpy franchise given the considerable growth in the local economy . The cost of the feasibility study amounted to $30 000 . Assume that you are the capital budgeting manager of THE COFFEE CLUB and have been assigned to this project . Consider the following information and calculate the relevant cash flows for the two mutually exclusive locations . The coffeehouses will have the same serving capacity , i.e . they are the same size . The cost of kitchen and restaurant equipment will amount to $600 000 . Installation cost will amount to $25 000 . The change in net working capital is $90 000 . Although THE COFFEE CLUB operates as a franchise , they still consider operating cash flows before setting up a new franchise to ensure the maximum profitability . Annual sales in Westfield Parramatta is expected to be $1 . 4 million and $900 000 in Sunshine Marketplace . THE COFFEE CLUB franchisee will rent suitable premises to house the coffeeshop . In Westfield Parramatta the annual rent will amount to $200 ,0no whereas the annual rent in Sunshine Marketplace will be slightly less , namely $170 000 . Operating expenses ( excluding depreciation ; will amount to $500 000 p . a. for Westfield Parramatta and $450 000 p. a. for Sunshine Marketplace .Fixed ( non - current ; assets are expected to have a life span of 5 years and will be depreciated on a straight - line basis . Profits are taxed at the normal company tax rate of 28% Assets will be sold after 5 years . Given the fact that sales in Westfield Parramatta are expected to be higher ( and thus assets are exposed to more wear and tear ) . THE COFFEE CLUB expects to get less for Westfield Parramatta's assets than those of Sunshine Marketplace . It is thus expected that Westfield Parramatta's assets could be sold after 5 years for $18 000 whereas Sunshine* Marketplace's could be sold for $20 0DO . Therefore , you are required to " [a ] Calculate the Initial Investment Outlay ( I10) of the new franchises . Note : it will be the same for Westfield Parramatta and Sunshine Marketplace . Clearly show your calculations . ( * ) ( 0) Calculate the Operating Cash Flows ( OCFS; for both locations for the first year . Clearly show all calculations . (6 ) ( C ) Calculate the terminal Cash Flow I TOF ; in the last year for both locations . Clearly show your calculations . Assume that the capital gain tax applies at a rate of 25%6 . ( 7 ) ( d) What is the optimal location for the new THE COFFEE CLUB franchise ? The required rate of return is 15%/6 . Motivate your answer using the NPY and IFA technique . ( 1 1 )
