Using the financials for Starbucks 2016(DATA ATTACHED), which you have, calculat

Question

Using the financials for Starbucks 2016(DATA ATTACHED), which you have, calculate the NPV and IRR of opening a new store. Make whatever assumptions you need to calculate the cash flow. Discount the cash flows at the WACC you already calculated for Starbucks.(WACC=5.65%)

Use the Starbucks 2016 financials to calculate the cash flow to be obtained in first ways, for both ways use 25,000 stores:
1-Subtract the depreciation and amortization expense from the total operating expense.
2-Subtract the result obtained in part 1 from the total net revenues.
3-Consider the average Starbucks store to cost $500,000, calculate the depreciation for this store over 15 years.
4-Calculate the cash flows per store with these measures
5-Using the WACC you already have, calculate the NPV and IRR for a store over 15 years. Suppose the cash flow does not vary over time.

Balance Sheet All numbers in thousands Period Ending Current Assets Cash And Cash Equivalents Short Tem Investments Net Receivables Inventory 10/2/2016 2,128,800 134.400 768,800 1,378,500 Other Current Assets 347.400 Total Current Assets Long Term Investments Property Plant and Equipment 4,757,900 1,496,200 4,533,800 1,719,600 516,300 Goodwill Intangible Assets Accumulated Amortization Other Assets 403,300 885,400 14,312,500 Defered Long Term Asset Charges Total Assets Current Liabilities Accounts Payable Short/Current Long Term Debt Other Current Liabilities Total Current Liabilities Long Term Debt Other Liabilities 2,975,700 399,900 1,171,200 4,546,800 3, 185,300 689,700 Deferred Long Term Liability Charges Minority Interest Negative Goodwill Total Liabilities 6,700 8,428,500 Stockholders' Equity Misc. Stocks Options Warrants Redeemable Preferred Stock Preferred Stock Common Stock Retained Earnings Treasury Stock Capital Surplus Other Stockholder Equity Total Stockholder Equity Net Tangible Assets 1,500 5,949,800 41,100 108,400 5,884,000 3,648,100

Explanation / Answer

WORKING NOTE:

Total outflows: $ Capital cost of opening a store                500,000 Inflows: 1 a)Let us first calculate the operating cash flow inflow per year per store: Cash flow from operations for 25000 stores    4,575,100,000 Estimated Operating cash flow from one store                183,004 (4575100000/25000) Note: Cash flow from investing & Financing activities are ignored for this calculation as Cost of opening a store is given. It is assumed that apart from this capital cost of 500000, there is no other incremental financing and investing cost/cashflow. WACC 5.65% Present value annuity factor of 5.65% for 15 years 9.93827 Therefore, PV of operating cash flow (inflow) $            1,818,743 (183004*9.93827) Net Present value = PV of cash inflows-PV of cash outflows    = 1818743-500000=            1,318,743 2 Calculation of IRR: IRR can be calculated by trial and error method, using the cashflows as above. At IRR, both cash outflows & inflows will be equal. As given in the working, at 35%, the total inflows is 517069, which is above cash outflow At 37%, the cash infows works out to 490205, which is lesser than the cash outflow of 500000 Hence, the IRR is in between 35% & 37% IRR = R1+((NPV1*(R2-R1))/(NPV1-NPV2) 0.362707713               Where, R1 is the lower rate (35%)               NPV1, is the npv at lower rate               NPV2, is the npv at higher rate IRR = 0.35+((17069*(0.37-0.35)/(17069-(-9795)))) Therefore, IRR=36.27%

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