Starbuck\'s is considering opening another store in Chicago. A store is expected

Question

Starbuck's is considering opening another store in Chicago. A store is expected to have a long economic life, but the valuation horizon is 9 years. The store in Chicago is expected to create revenues of $4.8M in the first year and they are likely to grow at 2.0% per year thereafter. The cost of goods sold is $1.4M in year 1 and it is also expected to grow at 2.0% per year thereafter. Selling and administration costs are likely to be $0.8M in the first year and then grow at 3.0%. The tax rate is 35%. Starbucks is so good at managing its stores that working capital increases can be assumed to be negligible. But Starbucks will have to invest $4.6M in purchasing a store (with land). The good news is that this outlay can be straight line depreciated over 9 years. Also, Starbucks has estimated that the after-tax terminal value in year 9 dollars will be $12.6M. This value is the present value of all cash flows in year 10 and beyond. What is the NPV of opening this new store if the appropriate discount rate is 8.50%? (Again, all cash flows except initial investments happen at the end of the year. You are strongly encouraged to use a spreadsheet.) (Enter just the number in dollars without the $ sign or a comma and round off decimals to the closest integer, i.e., rounding $30.49 down to $30 and rounding $30.50 up to $31.)

Explanation / Answer

Step1 ) Initial investment

Purchase of land = $4.6 million

Step 2) Depreciation = Cost-salvage value/no years of useful life

=4.6/9 = $0.511 million

Step 3) Statement showing NPV

Particulars 1 2 3 4 5 6 7 8 9 Total Revenue 4.80 4.90 4.99 5.09 5.20 5.30 5.41 5.51 5.62 COGS 1.40 1.43 1.46 1.49 1.52 1.55 1.58 1.61 1.64 Selling and administration costs 0.80 0.82 0.85 0.87 0.90 0.93 0.96 0.98 1.01 Depreciation 0.51 0.51 0.51 0.51 0.51 0.51 0.51 0.51 0.51 PBT 2.09 2.13 2.18 2.22 2.27 2.32 2.36 2.41 2.46 Tax @ 35% 0.73 0.75 0.76 0.78 0.79 0.81 0.83 0.84 0.86 PAT 1.36 1.39 1.42 1.44 1.47 1.51 1.54 1.57 1.60 Add: Depreciation 0.51 0.51 0.51 0.51 0.51 0.51 0.51 0.51 0.51 Annual cash flow 1.87 1.90 1.93 1.96 1.99 2.02 2.05 2.08 2.11 Terminal cash flow 12.60 Total cash flow 1.87 1.90 1.93 1.96 1.99 2.02 2.05 2.08 14.71 PVIF @ 8.5% 0.92 0.85 0.78 0.72 0.67 0.61 0.56 0.52 0.48 PV of cash inflow 1.72 1.61 1.51 1.41 1.32 1.24 1.16 1.08 7.06 18.11 Initial investment 4.6 NPV 13.51

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.