Redevelopment of coffee shops

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Redevelopment of Coffee Shops

Ms. Matthews (CEO) wants her manager to evaluate the potential of developing several hundred stores into new store models with frozen yogurt services. Five hundred stores have been selected as candidates for development. It will cost $80,000 to convert each store, including modifications to refrigeration equipment, with these costs being capitalized with a 6% applicable CCA rate. The average modified coffee shop is expected to generate an additional $30,000 in after-tax cash flow every year. However, company is also estimated to lose about $15,000 in annual after-tax cash flow from these cafés, due to yogurt sales cannibalizing existing coffee shops. In other words, some customers who normally would have purchased coffee would instead purchase yogurt.

The five hundred stores have average annual rent of $36,000 each. Ms. Matthews needs her manager to evaluate the profitability of this investment after a seven year period, using the investment criteria of NPV and profitability index.

Reference no: EM132420873

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