You are considering starting or acquiring a business that will brew and sell coffee. Determine which option is best and whether it is really a smart idea, as well as what other financial dangers you may be exposed to and how to manage them.

Option 1: Start-up

assumptions:

You estimate that you'll need $1,500,000 to get started with starting up shop and purchasing fixed assets.

• You expect to make a EBIT of $150,000 in year one, $250,000 in year two,

$350,000 in year three and $300,000 after that.

• Depreciation expense will be $150,000.
• You expect to need to spend $50,000 per year on capital expenditure every year going forward
• You expect average debtors to be $200,000, inventory to be $220,000 and accounts payable to be $100,000.

You plan to sell the company at the end of ten years, and you expect to get a sale price based on Enterprise Value being 3.5 times final year projected maintainable earnings.

Option 2: Acquisition assumptions:

You also have the option of purchasing an established roast plantation. The P&L can be found here. You believe the following results provide a credible foundation for future performance:

• There is no rent expense included in these owners own the buildings. You will need to rent this and expect rent expense to be $120,000.
• no remuneration included for two working owners. You will need to pay yourself and hire an additional person to replace them. You think fair remuneration for these two roles is $850,000 each.
• No legal fees
• You feel that the business will also need to spend $50,000 per year on capital expenditure going forward.
• You also expect average debtors to also be $250,000, inventory to be

$100,000 and accounts payable to be $100,000.

• The vendors are asking $1,850,000 for fixed assets and goodwill.
• At the end of 10 years, you intend selling the business and hope to receive a sale price based on Enterprise Value being a multiple of 3.5 times final year future maintainable earnings.

Funding & capital structure

The banks are willing to provide 40% of the funding for either option on an interest only basis at an interest rate of 6% per annum.

Required

prepare a report to your other directors considering these options and making a recommendation as to which option should be pursued if any. Your report should also address any other relevant financial issues or opportunities in relation to the proposed investment.

if you consider weighted average cost or return on capital you can choose if you do this on either a before or after tax basis.

Revenue Sales 4,769,344 Cost of Sales Bean Cost of sales Direct Wages Freight 1,907,738 1,096,949 47,855 3,052,542 Total Cost of Sales Gross Profit 1,716,802 Operating Expenses Advertising Sales wages Repairs and Maintenance Electricity Postage, Printing & Stationery Insurance Freight Professional Services Fees Motor Vehicle Expenses ACC Rates General Expenses Legal Fees Bank Charges Telephone Subscriptions 274,323 90,233 87,660 82,000 76,000 56,033 45,333 26,487 72,354 24,566 9,875 16,544 16,443 6,244 7,688 5,676 897,459 Total Operating Expenses EBITDA 819,343 Depreciation 163,229 163,229 Total Depreciation EBIT 656,114 Interest Expense 167,344 EBT 488,770 Income Tax Expense 136,856 Net Profit / Net Earnings After Tax 351,915 Revenue Sales 4,769,344 Cost of Sales Bean Cost of sales Direct Wages Freight 1,907,738 1,096,949 47,855 3,052,542 Total Cost of Sales Gross Profit 1,716,802 Operating Expenses Advertising Sales wages Repairs and Maintenance Electricity Postage, Printing & Stationery Insurance Freight Professional Services Fees Motor Vehicle Expenses ACC Rates General Expenses Legal Fees Bank Charges Telephone Subscriptions 274,323 90,233 87,660 82,000 76,000 56,033 45,333 26,487 72,354 24,566 9,875 16,544 16,443 6,244 7,688 5,676 897,459 Total Operating Expenses EBITDA 819,343 Depreciation 163,229 163,229 Total Depreciation EBIT 656,114 Interest Expense 167,344 EBT 488,770 Income Tax Expense 136,856 Net Profit / Net Earnings After Tax 351,915