Starbucks is discussing a new project amongst their management team They are considering a project where they will sell to the public the coffee makers that they use in their stores This way customers can brew their Starbucks coffees at home and not have to worry about going inside the restaurant and being exposed to other people The chief marketing officer (CMO) estimates that they will sell 3,000 units a year for 5 years at a price of $195 each The chief operations officer (COO) estimates that the variable costs to build these will be 75 of revenue The COO says the company will need to buy an assembly line to make these The assembly line costs $575,000 and has a shipping cost of $25,000 The COO adds that they will need to purchase an additional $40,000 in inventory and accounts payable will increase by $9,500 Once the project ends, they will no longer need additional inventory and will pay the accounts payable balance The chief financial officer (CFO) The CFO says to use the MACRS 3 year class for depreciation (These are the same rates as used in the slides ) He estimates that the assembly line will have a salvage value of $25,000 He notes that Starbucks tax rate is 24 and that the normal WACC is 7 2 The CMO notes that they have done an extensive marketing survey and many Starbucks customers are scared to go to a store in todays environment and would be happy to purchase their own equipment This research is already paid for and cost $55,000 QUESTION 8 Use the data provided for Starbuck's and their proposed project to answer this question What are the tax expenses in year 3 of this project A $13,500 B $23,785 C $39,563 D $52,000 QUESTION 9 Use the data provided for Starbuck's and their proposed project to answer this question What are the operating cash flows in year 4 (This is the EBIT (1 T) Dep Ex) A $97,650 B $102,678 C $121,230 D $181,860 QUESTION 10 Use the data provided for Starbuck's and their proposed project to answer this question What is the after tax salvage value A $19,000 B $25,800 C $38,000 D $45,800 QUESTION 11 Use the data provided for Starbuck's and their proposed project to answer this question What are the terminal cash flows A $48,800 B $49,500 C $53,000 D $61,800 QUESTION 12 Should the $55,000 spent on marketing research be included in this business case If so, where A YES this is an operating cost B YES this is a revenue reduction C YES this is an outflow in year 0 D NO this is a sunk cost QUESTION 13 Use the data provided for Starbuck's and their proposed project to answer this question What is the NPV of this project A $103,000 23 B $87,497 17 C $16,345 89 D $68,572 66 QUESTION 14 Use the data provided for Starbuck's and their proposed project to answer this question What is the IRR of this project A 3 67 B 5 84 C 6 20 D 7 11 QUESTION 15 This project does have normal cash flows and we can use the IRR to evaluate it True False QUESTION 16 Use the data provided for Starbuck's and their proposed project to answer this question What is the MIRR of this project Use the WACC as both the reinvestment rate and the finance rate A 6 64 B 7 45 C 8 14 D 15 22 QUESTION 17 Why is the MIRR higher than the IRR A Because this is a very risky project B The MIRR is always more than the IRR C The IRR assumes reinvestment at the IRR rate which is less than the WACC D The MIRR assumes that there is only one sign change in the cash flows QUESTION 18 Use the data provided for Starbuck's and their proposed project to answer this question What is the payback period for this project A 1 37 years B 2 94 years C 3 94 years D 4 26 years QUESTION 19 Use the data provided for Starbuck's and their proposed project to answer this question What is the discounted payback period for this project A There is not one B 2 66 years C 3 66 years D 4 66 years

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Starbucks is discussing a new project amongst their management team. They are considering a project where they will sell to the public the coffee makers

Starbucks is discussing a new project amongst their management team. They are considering a project where they will sell to the public the coffee makers that they use in their stores. This way customers can brew their Starbucks coffees at home and not have to worry about going inside the restaurant and being exposed to other people.

The chief marketing officer (CMO) estimates that they will sell 3,000 units a year for 5 years at a price of $195 each.

The chief operations officer (COO) estimates that the variable costs to build these will be 75% of revenue. The COO says the company will need to buy an assembly line to make these. The assembly line costs $575,000 and has a shipping cost of $25,000. The COO adds that they will need to purchase an additional $40,000 in inventory and accounts payable will increase by $9,500. Once the project ends, they will no longer need additional inventory and will pay the accounts payable balance.

The chief financial officer (CFO) The CFO says to use the MACRS 3 year class for depreciation. (These are the same rates as used in the slides.) He estimates that the assembly line will have a salvage value of $25,000. He notes that Starbucks tax rate is 24% and that the normal WACC is 7.2%.

The CMO notes that they have done an extensive marketing survey and many Starbucks customers are scared to go to a store in todays environment and would be happy to purchase their own equipment. This research is already paid for and cost $55,000.

QUESTION 8

Use the data provided for Starbuck's and their proposed project to answer this question.

What are the tax expenses in year 3 of this project?

A.
$13,500

B.
$23,785

C.
$39,563

D.
$52,000

QUESTION 9

Use the data provided for Starbuck's and their proposed project to answer this question.

What are the operating cash flows in year 4? (This is the EBIT (1-T) + Dep. Ex)

A.
$97,650

B.
$102,678

C.
$121,230

D.
$181,860

QUESTION 10

Use the data provided for Starbuck's and their proposed project to answer this question.

What is the after tax salvage value?

A.
$19,000

B.
$25,800

C.
$38,000

D.
$45,800

QUESTION 11

Use the data provided for Starbuck's and their proposed project to answer this question.

What are the terminal cash flows?

A.
$48,800

B.
$49,500

C.
$53,000

D.
$61,800

QUESTION 12

Should the $55,000 spent on marketing research be included in this business case? If so, where?

A.
YES- this is an operating cost

B.
YES- this is a revenue reduction

C.
YES- this is an outflow in year 0

D.
NO - this is a sunk cost

QUESTION 13

Use the data provided for Starbuck's and their proposed project to answer this question.

What is the NPV of this project?

A.
-$103,000.23

B.
-$87,497.17

C.
-$16,345.89

D.
$68,572.66

QUESTION 14

Use the data provided for Starbuck's and their proposed project to answer this question.

What is the IRR of this project?

A.
3.67%

B.
5.84%

C.
6.20%

D.
7.11%

QUESTION 15

This project does have normal cash flows and we can use the IRR to evaluate it.

True

False

QUESTION 16

Use the data provided for Starbuck's and their proposed project to answer this question.

What is the MIRR of this project? Use the WACC as both the reinvestment rate and the finance rate.

A.
6.64%

B.
7.45%

C.
8.14%

D.
15.22%

QUESTION 17

Why is the MIRR higher than the IRR?

	A.	Because this is a very risky project
	B.	The MIRR is always more than the IRR.
	C.	The IRR assumes reinvestment at the IRR rate which is less than the WACC.
	D.	The MIRR assumes that there is only one sign change in the cash flows.

QUESTION 18

Use the data provided for Starbuck's and their proposed project to answer this question.

What is the payback period for this project?

A.
1.37 years

B.
2.94 years

C.
3.94 years

D.
4.26 years

QUESTION 19

Use the data provided for Starbuck's and their proposed project to answer this question.

What is the discounted payback period for this project?

A.
There is not one

B.
2.66 years

C.
3.66 years

D.
4.66 years