the specific location that the partners were looking at was 1,571 square feet of retail space located next to Bernard Callebaut, a specialty chocolate shop, and Crave Cupcakes, a specialty bakery. The partners felt that they had a similar target market to both neighboring stores, and so the location seemed to be a great fit. As well, they planned to source their baked goods from their neighboring business on an as-needed basis and had negotiated an average cost of $1.25 per item. Lehnert had preliminary discussions with the landlord and felt that the partners would be able to secure a competitive five-year lease for $45 per square foot per annum. After meeting with a local contractor, they estimated that leasehold improvements would be required at approximately $35,000.

PRELIMINARY ESTIMATES Lehnert worked with one of his father's friends who had some experience in the restaurant business and developed a list of equipment and fixtures that would be required to open a caf in such a premium location (see Exhibit 2). He knew that they would also need very qualified and professional staff with wages at $16.00 per hour plus 20 per cent benefits. Lehnert hoped that the $16 wage rate compared to Alberta's $9.40 minimum wage rate18 would be very attractive. The caf would be open to the public from 6 a.m. to 11 p.m., seven days a week, and staff would be needed for 126 hours per week. The caf would require two staff at all times. For the first year, Lehnert would stay on as manager and oversee all operations, but it was clear that he would need time to grow the business and continue his sourcing and outreach trips to Haiti, so the partners decided to hire a part-time manager who was a recent university graduate and train him or her to take over the position. Lehnert hoped to find a suitable candidate for $25,000 per year. Once they required a full-time manager, they expected to pay him or her an annual salary of $60,000.

The partners estimated that they would spend an initial $10,000 on marketing and promotion prior to opening and continue with a $1,000 monthly budget for the first year. They anticipated that annual utilities would run approximately $15 per square foot in addition to telephone and Internet charges of $300 per month. Lehnert's father had helped him obtain a quote from an insurance company to insure the contents of the caf for a premium of $250 per month. Miscellaneous administrative costs were estimated to be $350 per month. Other upfront costs would be legal fees, incorporation costs, licenses and permits, which were estimated at $10,000, plus a $2,000 utilities deposit and another $6,000 rental deposit. In addition, they would need to have someone professionally install and certify the roaster, which would cost approximately $10,000. Monthly maintenance on the machines would be roughly $500.

PRICING Lehnert spent considerable time working on his menu and figured an average price of $3.00 for regular drip coffee and $4.00 for specialty drinks such as espresso and lattes would be reasonable, particularly when compared to the average price of $5.25 at their closest competitor, Starbucks. There were numerous drink possibilities and numerous different sizes that Lehnert believed would be an important aspect when choosing the menu. Their chosen location had decent foot traffic and was near a popular park, so the partners estimated they could sell between 200 and 300 drinks per day evenly split between regular drip and specialty drinks. The estimated average cost of a beverage would be 20 per cent of the selling price.19 They expected that 50 per cent of their daily customers would purchase a baked good along with their beverage at a price of $2.50. The partners further estimated that 10 per cent of their daily customers would purchase a bag of coffee for home use at $16.50 per 10-ounce bag. This price was identical to the planned online price and generated a 60 per cent margin.

RAISING CAPITAL As the partners discussed their venture, they thought that between the three of them and their families they could raise $75,000, but this would clearly not be enough capital to get started. Lehnert was approached by one of his very wealthy friends who was interested in investing and was offered $250,000 for a 60 per cent stake in the business. The partners also considered the option of taking on either a line of credit or a fixed- rate term loan for the remaining capital needed. After several long meetings discussing the potential financing options for the caf, the partners decided that their best strategy would be taking on debt to finance the investment rather than giving up 60 per cent of their equity. With $75,000 in equity, they decided that they would need $250,000 in debt and that they were interested in a term loan with an interest rate of 13 per cent per annum plus a line of credit for any financing requirements above this amount. The partners had no doubt that the bank would require a guarantee from at least one of their parents to secure this level of debt. The partners knew they would need a detailed business plan before any serious decisions could be made and before approaching a bank. Though they felt reasonably confident with their cost projections, they worried that their daily sales projections were more a "gut feel" rather than based on strong data. After many long hours and too many cups of their delicious coffee, the partners sat down to pull together their business plan and see if their caf was just a dream or a dream about to come true.

1. Categorize and make separate list of the start-up costs, ongoing fixed and variable costs for Caf Xaragua. Fixed costs must be presented in the annual amount. Assume that Lehnert would be paid $35,000 for part-time management for Year 1. Capital assets can be depreciated over 10 years. Also a list of the sales items and selling prices. (15 marks)

2. Prepare budget (annual) contribution margin income statements for Year 1 and Year 2 assuming 250 total daily drinks. Show detailed revenues for individual products and detailed variable and fixed costs information in the statements. (15 marks)

3. Compute the break-even in sales revenue for 2nd year for the company as a whole (including all products). Compute the margin of safety and MOS%. Interpret the numbers for Caf Xaragua. What is the DOL for Year 2? Interpret the number. (10 marks)

4. Other than the compensation for Lehnert as manager, the partners are expecting a before-tax profit of $60,000. Calculate the sales revenue to achieve the target profit in Year 2. Comment on Caf Xaragua's ability to meet the target (4 marks).

5. Are Lehnert's sales estimates reasonable? Perform some sensitivity analysis. Redo required 2 by preparing annual income statement for Year 2 at a) 200 total daily drinks and b) 300 total daily drinks (6 marks).

6. Based on the profit projected in required 2 and 5, compute the return on investment (ROI) under the three scenarios for Year 2. Summarize your findings from required 2 - 6. Should Lehnert proceed with this venture based on the quantitative analysis? (8 marks)

7. Assume a July to June 12-month period, make a cash budget for the first year, by month and annual. Assume that the capital investments and other start-up costs would incur in the first month - July. Also, assume that the sales volume in July and August would be only 50% of the average monthly forecast. All sales are cash sales. All purchases and operating expenses would be paid in the month of the purchase. Would the $250,000 loan be sufficient to cover the cash flow for the year? The company would be making monthly principal and interest payments for the loan starting July. Based on the cash budget, would the company be able to pay back the loan in 5 years? (12 marks)

8. Perform a detailed internal and external analysis of Caf Xaragua applying tools such as SWOT, PEST, etc. (10 marks).

Looking for answers for the last 4.