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Your analysis should contain the following:
1. Provide a completed pro forma balance sheet.
2. Forecast annual future income statements for the next 5 years for the base case outlined in the case.
Assume that they will use 100% equity financing.
To do this, you will need to identify and forecast:
• The sources of revenue each year and the associated cost of goods sold.
• The other recurring selling, general, and administrative expenses besides cost of goods sold.
• Depreciation expense for the required capital expenses including leasehold improvements.
• You can assume all capital assets are depreciable for tax purposes straight line over 5 years.
• Tax expense (assume that the tax rate for an Alberta corporation is 27%).
3. Determine the IRR on the invested capital in the base case assuming they sign a 5-year lease and operate for 5 years. Assume that the capital equipment, excluding leasehold improvements, has a salvage value in 5 years equal to 20% of the purchase price.
To do this, calculate the IRR, you will need to identify:
• The time 0 capital investments, working capital investments, and other upfront expenses.
• The free cash flow each year.
4. Develop some other scenarios. Start by assuming that sales levels are different from the base case, but cost of goods sold has the same per unit cost and all other expenses and investments are the same (SG&A, capital investments, up-front expenses, etc…). Vary some other key variables that will likely differ from the base case and determine the IRRs in these scenarios. Be sure to explain why you chose the variables to decide to change. Using two-way data tables would be a good way conduct your scenario analysis.
5. Make some specific recommendations regarding: (1) whether or not the the project is a good investment, and (2) recommended operating decisions they could make to achieve the best results. Provide an explanation of your conclusions based on your analysis.
Discussion Question (no written analysis is necessary although you can include in your analysis)
Assume that they use a term loan to cover the deficit between the amount of capital they need to fund all up-front investments and the initial $75,000 equity investment. Briefly evaluate the credit quality from the perspective of a bank considering providing the firm a 13% 5-year term loan amortizing equally over the next 5 years. Assume that the liquidation value of all capital assets is 75% of book value.
BRINGING HAITIAN COFFEE TO THE WORLD WITH A FOCUS ON HAITIAN CULTURE, REFORESTATION, AND MEETING THE NEEDS OF THE LOCAL PEOPLE.
GROWN IN HAITI | ROASTED IN CANADA
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