Overview Please note that this is an INDIVIDUAL project. You have recently assumed the role of CFO at your company. The company's CEO is looking to expand its operations by investing in new property,...

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Answered 16 days AfterSep 29, 2021

Answer To: Overview Please note that this is an INDIVIDUAL project. You have recently assumed the role of CFO...

Khushboo answered on Oct 16 2021
128 Votes
CAPITAL BUDGETING ANALYSIS
Starbucks Corporation
1
An Introduction
PROJECT OVERVIEW
Objective – Expand operations by 10% of current net property, plant and equipment (PPE)
Parameters
New PPE has 12 years of useful life
Straight-line depreciation
Salvage value of 5% of cost
Project will bring in annual EBIT of 18% of cost
No increases in net working capital each year
35% tax rate
Bench-mark rate (2021 WACC) of 6.47%
3
CALCULATIONS
Project Cost
Depreciation – using straight-line method
4
CALCULATIONS (cont.)
Net
terminal cash flow at the end of the project (t = 12)
Annual EBIT
5
ESTIMATION OF CASH FLOWS
Year 0 – initial investment (cash outlay) of $624,140,000
For each year, from Year 1 through Year 11
6
ESTIMATION OF CASH FLOWS (cont.)
Year 12
7
ESTIMATION OF CASH FLOWS (cont.)
Summary
8
CAPITAL BUDGET ANALYSIS
9
CAPITAL BUDGET ANALYSIS
Net present value
NPV of project = PV of Estimated future CFs discounted at WACC rate - Project cost
$407,210,615 using excel NPV function
Internal rate of return
17.10% using excel IRR function
Discounted payback period
6.22 years based on cumulative discounted CF
10
SUMMARY AND RECOMMENDATION
Project is having the positive Net Present Value
Project’s Internal Rate of Return is approximately 4 times the Required Rate of Return (WACC)
Initial costs can be recovered in almost half of the life of the project
PROJECT SHOULD BE ACCEPTED
11
APPENDIX
12
REFERENCES
Brigham, E. F., & Ehrhardt, M. C. (2015). Financial Management: Theory & Practice (15th ed.). Boston: Cengage Learning.
Gurufocus. (2021). Starbucks Corp (NAS:SBUX) WACC. Retrieved from Gurufocus: https://www.gurufocus.com/term/wacc/SBUX/WACC-/Starbucks-Corp
Starbucks. (2020). Form 10K. Retrieved from Investor. Starbucks:
https://s22.q4cdn.com/869488222/files/doc_financials/2020/ar/2020-Starbucks-Annual-Report.pdf
13
Net PPE as of Sep 27, 20206,241,400,000
Expansion target10%
Cost of PPE expansion project624140000
Basis for depreciation624,140,000
Useful life12
Annual depreciation52,011,667
Sheet2
                    Calculation of cost of PPE project
                    Net PPE as of Sep 27, 2020    6,241,400,000
                    Expansion target    10%
                    Cost of PPE expansion project    624140000
                    Calculation of depreciation
                    Depreciation
                    Basis for depreciation    624,140,000
                    Useful life    12
                    Annual depreciation    52,011,667
                    Determination of terminal value at year12
                    Cost of PPE expansion project    624140000
                    Salvage value    5%
                    Salvage value    31207000
                    Gain    31207000
                    Taxrate    35%
                    Tax on gain    10922450
                    Net terminal cash flow    20284550
                                        CALCULATION OF NET PRESENT VALUE
                    Annual EBIT
                    Project cost    624140000                Year    Net cash flow    Pvf @ 6.47%    Present value
                    Estimated annual EBIT    18%                0    -624140000    1    -624140000
                    Annual EBIT    112345200                1    125,036,047    0.9392317085    117437820
                                        2    125,036,047    0.8821562022    110301324
                    Calculation of project cash flow for the year 1-11                    3    125,036,047    0.8285490769    103598501
                    EBIT    112345200                4    125,036,047    0.778199565    97302997
                    Taxes    39320820                5    125,036,047    0.730909707    91390060
                    Operating profit after tax    73024380                6    125,036,047    0.6864935728    85836442
                    Annual Depreciation    52,011,667                7    125,036,047    0.6447765313    80620308
                    Project net cash flow    125,036,047                8    125,036,047    0.605594563    75721150
                                        9    125,036,047    0.5687936161    71119705
                    In year 12                    10    125,036,047    0.5342289998    66797882
                    Operating profit after tax    73024380                11    125,036,047    0.5017648162    62738689
                    Annual Depreciation    52,011,667                12    145,320,597    0.4712734256    68485735
                    Terminal value    20284550
                    Total flow    145,320,597                Net Present Value            407210615
                                        CALCULATION OF IRR
                                        Year    Net cash flow
                                        0    -624140000
                                        1    125,036,047
                                        2    125,036,047
                                        3    125,036,047
                                        4    125,036,047
                                        5    125,036,047
                                        6    125,036,047
                                        7    125,036,047
                                        8    125,036,047
                                        9    125,036,047
                                        10    125,036,047
                                        11    125,036,047
                                        12    145,320,597
                                        IRR    17%
Sheet3
Sheet2
                    Calculation of cost of PPE project
                    Net PPE as of Sep 27, 2020    6,241,400,000
                    Expansion target    10%
                    Cost of PPE expansion project    624140000
                    Calculation of depreciation
                    Depreciation
                    Basis for depreciation    624,140,000
                    Useful life    12
                    Annual depreciation    52,011,667
                    Determination of terminal value at year12
                    Cost of PPE expansion project    624140000
                    Salvage value    5%
                    Salvage value    31207000
                    Gain    31207000
                    Taxrate    35%
                    Tax on gain    10922450
                    Net terminal cash flow    20284550
                                        CALCULATION OF NET PRESENT VALUE
                    Annual EBIT
                    Project cost    624140000                Year    Net cash flow    Pvf @ 6.47%    Present value
                    Estimated annual EBIT    18%                0    -624140000    1    -624140000
                    Annual EBIT    112345200                1    125,036,047    0.9392317085    117437820
                                        2    125,036,047    0.8821562022    110301324
                    Calculation of project cash flow for the year 1-11                    3    125,036,047    0.8285490769    103598501
                    EBIT    112345200                4    125,036,047    0.778199565    97302997
                    Taxes    39320820                5    125,036,047    0.730909707    91390060
                    Operating profit after...
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