One of the big Coffee chain is planning to open a new store in New York Opening

Question

One of the big Coffee chain is planning to open a new store in New York

Opening a new store - Whether to go ahead or not. Below are some details

Cost of Capital = 6.15%

Current Stores - 27000

Set up Costs: The cost of setting up a new store is $5 million right now, and this cost is expected to grow at the inflation rate in future years. The cost is depreciable, straight line, over 10 years down to a salvage value, which is 30% of the initial investment.

Note: Cash flow from investing & Financing activities are ignored

Cash flow from operations for 27000 stores = 4.174 Billion

Revenue Estimate in millions from new store opening

G&A allocation will be 5% of the revenues each year

operating expenses are assumed to be 30% of the revenues

¨The income from the investment will be taxed at marginal tax rate of 32%.

Calculate the Return on Capital (ROC) and Return on Invested Capital (ROIC) for the New Store

Estimate Accounting Earnings on Project

Year1 Revenues 1 0 2 5 3 7 4 10 5 12 6 12 7 15 8 15 9 15 10 15

Explanation / Answer

Here, Depreciation per year = Intial value - salvage value / no of useful life

= 5 -1.5 /10 = 0.35 million / year

Accounting Earnings = Revenue - Cost of Goods Sold (COGS) - General & Administrative Expenses - Depreciation - Interest Expense + Internet Income - Taxes

ROC = PV of (Accounting Earnings) / Pv of (Capital)

ROIC = PV of (Accounting Earnings) / Intial Capital

Calculation below

Note :The answer seems to be little discomfortable .Kindly check the data in the question , as answer is true for given data

Year 0 1 2 3 4 5 6 7 8 9 10 Total Cash flow ($5.00) Revenue $0.00 $5.00 $7.00 $10.00 $12.00 $12.00 $15.00 $15.00 $15.00 $15.00 $106.00 G/A(5%) $0.00 ($0.25) ($0.35) ($0.50) ($0.60) ($0.60) ($0.75) ($0.75) ($0.75) ($0.75) ($5.30) Operating Expanses(30%) $0.00 ($1.50) ($2.10) ($3.00) ($3.60) ($3.60) ($4.50) ($4.50) ($4.50) ($4.50) ($31.80) Depreciation ($0.35) ($0.35) ($0.35) ($0.35) ($0.35) ($0.35) ($0.35) ($0.35) ($0.35) ($0.35) ($3.50) Operating Income ($0.35) $2.90 $4.20 $6.15 $7.45 $7.45 $9.40 $9.40 $9.40 $9.40 $65.40 Tax(32%) 0 ($0.93) ($1.34) ($1.97) ($2.38) ($2.38) ($3.01) ($3.01) ($3.01) ($3.01) ($21.04) NOPAT ($0.35) $1.97 $2.86 $4.18 $5.07 $5.07 $6.39 $6.39 $6.39 $6.39 $44.36 Book value of capital $4.65 $4.30 $3.95 $3.60 $3.25 $2.90 $2.55 $2.20 $1.85 $1.50 PV ( capital) $4.39 $3.83 $3.32 $2.85 $2.43 $2.04 $1.70 $1.38 $1.10 $0.84 $23.86 PV( NOPAT) ($0.33) $1.76 $2.40 $3.31 $3.79 $3.57 $4.25 $4.01 $3.78 $3.57 $30.11 ROC of project 126.16% ROIC of project 602.13%

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

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