The chief marketing officer (CMO) estimates that they will sell 7,000 units a year for 5 years at a price of $150 each. If people really like the concept of brewing their own frappuccinos and lattes she estimates that they will sell 8,000 units a year and can charge $175 per unit. She estimates that there is a 20% 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 5,000 units and can only sell them for $100 each. She estimates there is a 30% chance of this happening.

The chief operations officer (COO) estimates that the variable costs to build these will be 60% of revenue. If they can get the higher volumes, then he estimates the cost to be only 55%. But with the really low volumes the cost will be 75%.

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 $20,000. However, he notes that worst case there may be nothing to salvage and best case they could find a buyer willing to pay $40,000. He notes that Starbucks tax rate is 21% and that the normal WACC is 9.5%. He notes that the WACC could be as high as 11% (worst case) and as low as 8% (best case).

Which of the variables we looked at in the sensitivity analysis of Starbuck's project have the biggest impact on the project's NPV?

What is the NPV in the BEST case scenario?

What is the NPV in the WORST case scenario?

What is the Expected NPV for this project?

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

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

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

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