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

Question

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,...

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, plant, and equipment. You are asked to do some capital budgeting analysis that will determine whether the company should invest in these new plant assets.

Signature Assignment Parameters

By the end of Week 3 - select a company, download the most recent copy of the company's 10-K report, and submit your company choice to your professor for approval.

The parameters for the week 7 project deliverable are as follows.

The firm is looking to expand its operations by 10% of the firm's net property, plant, and equipment. (Calculate this amount by taking 10% of the property, plant, and equipment figure that appears on the firm's balance sheet.)

The estimated life of this new property, plant, and equipment will be 12 years. The salvage value of the equipment will be 5% of the property, plant and equipment's cost.

The annual EBIT for this new project will be 18% of the project's cost.

The company will use the straight-line method to depreciate this equipment. Also assume that there will be no increases in net working capital each year. Use 35% as the tax rate in this project.

The hurdle rate for this project will be the WACC that you are able to find on a financial website, such as Gurufocus.com. If you are unable to find the WACC for a company, contact your instructor. He or she will assign you a WACC rate.

Signature Assignment Deliverables

Prepare a narrated PowerPoint presentation that will highlight the following items.

Your calculations for the amount of property, plant, and equipment and the annual depreciation for the project

Your calculations that convert the project's EBIT to free cash flow for the 12 years of the project.

The following capital budgeting results for the project
- Net present value
- Internal rate of return
- Discounted payback period.

Your discussion of the results that you calculated above, including a recommendation for acceptance or rejection of the project

Once again, you may embed your Excel spreadsheets into your document. Be sure to follow APA standards for this project.

Grading Rubric

	Possible Points	Criteria and Point Range
Calculation of Cost of Project	18	0-5	6-9	10-14	15-18
Calculation of Cost of Project	18	All calculations are incorrect, or not presented.	Calculation of PP&E, salvage value, or annual depreciation is incorrect.	Cost of PP&E is mostly correct with some minor calculation errors.	Cost of Property, plant and Equipment and annual depreciation correctly calculated.
Estimation of Cash Flows	27	0-13	14-18	19-23	24-27
Estimation of Cash Flows	27	All aspects of the cash flow calculation are incorrect, or not presented.	Significant, but identifiable errors are presented in the calculation to convert income to cash flows..	Cash flows are properly converted from accrual-based net income to cash flows from the project, with minor errors.	Cash flows are properly converted from accrual-based net income to cash flows from the project.
Capital Budgeting Analysis	27	0-13	14-18	19-23	24-27
Capital Budgeting Analysis	27	All of the capital budgeting calculations are incorrect, or not presented.	Two errors noted in the NPV, IRR, and Discounted Payback Period calculations.	One error noted in the NPV, IRR and Discounted payback period calculations.	All of the NPV, IRR, and Discounted Payback period calculations are correct.
Form	18	0-5	6-9	10-14	15-18
Form	18	Poor writing and presentation skills, or no presentation provided.	Several problems noted in regard to writing and presentation skills.	Writing and presentation done well with a few minor errors	Virtually no errors in writing or presentation.

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Answered 16 days AfterSep 29, 2021

Khushboo · Accepted Answer

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 tax	73024380				6	125,036,047	0.

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,...

Overview

Signature Assignment Parameters

Signature Assignment Deliverables

Grading Rubric

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

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