Portfolio Milestone Option 2

Pilgrim Coffee Inc. is a successful chain ofcoffee shops that offers handcrafted coffee and espresso drinks usingoutsourced coffee beans. In their quest to deliver the best cup of coffeearound, top management has learned a lot about coffee beans from around theworld and are considering the task of roasting their own coffee beans in houseat their flagship cafe. They believe they can wholesale their roasted coffeebeans to other coffee shops, both local and afar and offer their packaged beansto customers in-house as well use the beans for their own drink creations. TheCOO is worried about the potentially high costs involved and would like to useyour finance knowledge to evaluate the new venture and address their concerns.

You are asked to completequestions 1. and 2. as follows:

1.      What is the total investment amount at the start of the project(i.e., year zero cash flow)?

2.      Prepare a depreciation schedule to show the amount of depreciationfor each year.

o  Createa depreciation schedule

Additional information:

CASESUMMARY

PilgrimCoffee Inc. is a successful chain of coffee shops that offers handcraftedcoffee and espresso drinks using outsourced coffee beans. In their quest todeliver the best cup of coffee around, top management has learned a lot aboutcoffee beans from around the world and are considering the task of roastingtheir own coffee beans in house at their flagship cafe. They believe they canwholesale their roasted coffee beans to other coffee shops, both local and afarand offer their packaged beans to customers in-house as well use the beans fortheir own drink creations. The COO is worried about the potentially high costsinvolved and would like to use your finance knowledge to evaluate the newventure and address their concern.

CASEOVERVIEW

Themain equipment required is a commercial coffee bean roaster. Management hastheir eyes set on a vintage commercial roasting machine which costs $180,000.The shipping and installation cost of the machine is $40,000.  Theroasting machine will be depreciated under the MACRS system using theapplicable depreciation rates which are 33%, 45%, 15%, and 7%respectively.  Production is estimated to last for three years, and thecompany will exit the market before intense competition sets in and erodesprofits. The market value of the coffee bean roaster is expected to be $120,000after three years. Net working capital of $5,000 is required at the start, whichwill be recovered at the end of the project. The coffee beans will be packagedin 12 oz. containers that sell for $22.00 each. The company expects to sell20,000 units per year; cost of goods sold is expected to total 70% of dollarsales.