Homework SourseOne of the big Coffee chain is planning to open a new store
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 |
Solution
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% | ||||||||||||
