Does the Coffee Packaging Project Maximize the Firm’s Value?

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What advice should I give to John Matthews and the board?

 

SKU: Mark000323

Respond to the following scenario with your thoughts, ideas, and comments. Be substantive and clear, and use research to reinforce your ideas.

Given that its food packaging customers have been inquiring about its ability to supply complementary products, Apex is considering coffee packaging as an additional diversification to its product line. You are able to catch James in Luke’s office and stop in to ask for their reaction to the query.

“Hi,” you say. “I’ve got a quick question for you both. May I interrupt for just a minute?”

“Sure,” says Luke. “What’s up?”

“I need to calculate the net present value (NPV) for the coffee packaging project—the coffee packaging production equipment and a lamination machine that will bond plastic substrates for airtight quality. Does the coffee packaging line make sense for us?”

“The process will be challenging, initially,” says Luke. “But once our employees acclimate, I anticipate a very efficient process. I’m certain we will be competitive in this industry.”

“I can definitely leverage the customers within the channels of distribution that we intend to reach with our food packaging line,” says James. “Many of them distribute coffee products. I also see an opportunity for snack-food packaging, which requires metalized lamination. This packaging can also be applied to health products such as antibacterial cloths. The possibilities are endless! Let’s try to make this work.”

“Thank you, both,” you say. “Would you get me the same type of information you gave me for the expansion project so that I can compute the cash flows?”

James laughs and says, “We anticipated this question!” Luke and I were just putting our information in an e-mail to you. You should have it by the time you get back to your office.”

“Thanks so much!” you say. “I knew I could count on you.”

Back in your office, the promised e-mail is in your Inbox. Now you can compute the cash flows given the following information:

  • Initial investment outlay of $20 million for equipment only
  • Project and equipment life: 5 years
  • Sales projected to be $12 million per year for 5 years.
  • Assume gross margin of 50% (exclusive of depreciation)
  • Depreciation: Straight-line for tax purposes
  • Selling, general, and administrative expenses: 10% of sales
  • Tax rate: 35%

As I started wondering if this coffee packaging project will maximize the firm’s value I said to myself, I’ll compute the NPV and see what it looks like and I will use a weighted average cost of capital (WACC) of 5% as reflected in the attached Week 5 NPV IRR.

This project should be calculated on its own merits; that is, separately from the food packaging product. I’ll include a recommendation on that point, and a couple of others in my 2-page executive summary.

You reach for your keyboard to make the following notes about the questions you want to address:

  • Does the coffee packaging project maximize the firm’s value?
  • Should the company undertake this project, the prior project, or both?
  • What advice should I give to John Matthews and the board?
  • How can I describe my assessment?
  • Should the second project be accepted?

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Chapter Name : Investment Analysis: Alternate Scenario

Primary Task Response: Respond to the following scenario with your thoughts, ideas, and comments. This will be the foundation for future discussions by your classmates. Be substantive and clear, and use examples to reinforce your ideas.

Over the weekend, you get a call from your brother. He is currently working for a large restaurant chain in their management training program.

“Hi, Lee,” you say. “How’s everything in the sandwich business?”

“Good,” he says. “Great, really. I’m calling because I need your financial brain.”

“Sure. What do you need?”

“Well, I think I found my niche with this job,” he says. “I like the business model this company uses, and I have an opportunity now to buy a franchise. Isn’t that great?!”

“Congratulations!” you say. “You’ve worked hard. You’ve earned it. So how can I help?”

“I want you to look at my personal finances and then help me to understand how to manage it all so I can be successful with this restaurant franchise.”

“Okay. Sure. Let me think about this first, and I’ll call you back after this next week is over. I’m working on some time-sensitive things at Apex and I want to be able to shift my focus.”

“That’s perfect,” he says. “I’ll clear my calendar for next weekend so we can get together—whatever is best for you.”

“Okay! See you soon.”

You hang up and think about how to apply all of the things you have learned over the past 5 weeks at Apex to help Lee manage his personal finances. Maybe a good place to start is to think about your own personal finances, and then translate that to your brother’s situation. Discuss the following:

  • How can you apply financial analysis techniques to your own personal financial management?
  • What opportunities do you see?

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