Question

I want you to apply the concepts we have discussed in class in a fun way. I do hope you will enjoy this exercise. Once upon a time, there was an amazing group of students who lived in Cronfwoman OneFiveOne. Right next to their house, was a hotel and within that hotel was a café called Café Bastel. The amazing students were approached by an investor, Ms Finn Ance Major, who asked for their help. The investor was contemplating buying Café Bastel for $1 million and wondered if that was a good investment. What is your recommendation to Ms Finn Ance Major? Here is some information to get you started:

1. The café sells (non‐alcoholic) beverages as well as snacks and lunch

2. The café is open for 7 days, from 7am to 7pm

3. At any point in time, there are 2 employees working in the café

4. The investment horizon is 10 years 5. Use a discount rate of 12%

6. Use a tax rate of 35% You will need to make assumptions (capex, working capital…..).

There is no “right” answer – first think about the big picture (strategy, marketing, ….) and then how that story translates into your assumptions. You will be graded based on the structure of your analysis, the consistency and realism of your assumptions, your creativity, and your use of the tools/learnings from class.

Answer 1

From the above data, we can understand the following:

Original value of Café Bastel (before the discounted rate of 12%): $1.12 million

Value at which the investor purchased: $1 million

Following hypothetical assumptions are made in accordance to the information provided (Total Investment):

1. Capital Expenditure:

Considering that the café is located in a prime region, following parameters are made inside the CapEx.

· Renovation of the Café: $50000

· New inventory and machineries: $20000

· Accessories: $10000

· Advertisement: $10000

· Other variable costs (one time): $20000

          The total capital expenditure: $110000

2. Working Capital:

Considering the following parameters inside the Working Capital:

· Monthly expenditure –

Raw materials for the café: $10000

· Salary of employees –

Considering that at most 2 employees to be there between 7am to 7pm and the pay is on hourly basis, the number of employees working in the café is 4 people.

Average salary paid to an employee on hourly basis: $10

No. of hours working by an employee (weekday): 6 hours

No. of hours working overtime by an employee (weekend): 1 hour

Hence, the estimated average pay (monthly) by an employee: $2500 (8 hours * $10 * 30 days)

   

           The total monthly Working Capital expenditure: $20000

3. Basic expenditure:

Considering the following parameters inside the basic expenditure:

· Water - $400

· Electricity - $600

            The total Basic Expenditure: $1000

   

Total monthly expenditure: $21000

Thus, the total investment sums around $1.11 million in buying the Café Bastel.

Following hypothetical assumptions are made in accordance to the information provided (Total Return on Investment):

Considering an average of 100 customers per day, based on weekdays and weekends.

The cost of items on the menu is generally 3 times of the raw materials.

So, revenue generated = cost of raw materials * 3

Revenue generated = $10000 * 3 which is $30000

In hand profit = Revenue generated – Total Monthly Expenditure (Before tax deduction)

                      = $30000 - $21000

                      = $9000

Tax on the profit: 35%

Calculations:

Net profit after tax deduction (monthly): $9000 - $9000*0.35 = $5850

Thus, the net profit income yearly: $5850*12 = $70200

Hence, in 10 years the estimated profit will be $70200*10 i.e $702000

Considering the inflation rate by 3%, and the actual cost of the café before the discounted price is $1.12 million.

The net amount at compounded interest will be 1.12 (1 + 0.03) ^10 i.e $1.5008 million

Hence, if after 10 years of investment Ms Finn Ance Major wants to sell off the café, she will be selling it at an estimated amount of $2.2 million ($1.5008 million + $702000).

From the initial investment, Ms Finn Ance Major would still be able to gain about $1million ($2.2 million - $1.1 million) as profit after 10 years, considering the break even point.

So, the investment would be fruitful for Ms Finn ance Major.