CougCoffee is an American coffee product retailer and manufacturer located in Pullman, WA. The
company president is Jack Ryan, who inherited the company. When the company was founded
over 50 years ago, it originally imported coffee beans from Mexico. The company focused on
roasting and retailing coffee beans to more than 30 states in the US. Over the years, the company
still maintains its original coffee beans retail business, accounting for about 50 percent of its total
revenue. Faced with stiff competition, the company also expanded into the business of
manufacturing coffee machines. You, as a Carson College business majored, are hired by the
company’s finance department to evaluate a new project for the company.
As of now, CougCoffee’s only coffee maker is named the QuickCofee (QC), and sales have been
excellent. CougCoffee’s main competitor in the coffee maker market is Stanley Black & Decker,
Inc. (SWK). CougCoffee’s QC is similar to the SWK’s Black & Decker but easier to use. However,
CougCoffee wants to introduce a new version of the coffee maker, the CoffeeMaster (CM), into
their lineup. CougCoffee spent $300,000 to develop the new CM, which can adjust brew
temperature according to different types of coffee beans and brews directly into the included 18-
ounce thermal mug or into any mug or cup of your choice. The company has spent a further
$50,000 on a marketing study to determine the new coffee makers expected sales figures.
CougCoffee can manufacture the new coffee maker for $55 per machine in variable costs. Fixed
costs for the operation are estimated to run $1,500,000 per year. The estimated sales volumes (in
units) are 140,000, 160,000, and 100,000 coffee makers per year for the next three years,
respectively. The unit price of the new coffee maker will be $95. The necessary equipment can be
purchased for $3,000,000 and will be depreciated on a five-year MACRS schedule. It is believed
the value of the equipment in three years will be $1,500,000.
As previously stated, CougCoffee currently manufactures the QC. Production of the existing
product is expecting to be terminated in two years. If CougCoffee does not introduce the new CM
product, sales of the existing product will be 100,000 and 90,000 units per year for the next two
years, respectively. The price of the existing coffee maker, QC is $75 per coffee maker, with
variable costs of $45 each and fixed costs of $900,000 per year. If CougCoffee does introduce the
new coffee maker, sales of the existing one will fall by 50,000 (units) coffee makers per year, and
the price of the existing coffee maker will have to be lowered to $40 per coffee maker.
Net working capital for the new project will be 20 percent of sales and will occur with the timing
of the cash flows for the year; for example, there is no initial outlay for NWC, but changes in NWC
will first occur in Year 1 with the first year’s sales. CougCoffee has a 20 percent corporate tax rate.
The company has a target debt to equity ratio of 0.5 and is currently A rated (according to S&P
500 ratings). The overall cost of capital of CougCoffee is 14 percent.
The finance department of the company has asked you to prepare a report to Jack, the company’s
CEO, and the report should answer the following questions.
QUESTIONS

1. Can you prepare the income statement and the total cash flow (CFFA) table for this new
   project?
2. Please use these tables to help explain to Jack the relevant and irrelevant cash flows of this
   project?
3. The company’s CEO, Jack, wants to understand the risk of the coffee maker industry better.
   Since CougCoffee’s main competitor, Stanley Black & Decker Inc (SWK), is a leading
   company in this industry, Jack asks you to perform the following analysis on SWK.
   a. Using the past N years of data (ending in December 2021), estimate your own beta
   and alpha of SWK based on a regression analysis. Document the data sources used.
   Also, explain how long a time period (from which year to which year) that you
   decide to use to perform your estimation, and explain why?
   b. Provide your beta and alpha estimates, as well as the statistical significance (e.g., t
   ratio, p-value). Comment briefly.
   c. Plot the security characteristic line for this company, and clearly show alpha and
   beta on the diagram. Is the company correctly priced, overpriced, or underpriced?
   d. From the above analysis, can you explain to Jack the risk characteristics of SWK
   and the coffee maker industry using the beta you estimated? Do you think your
   estimated beta makes sense given the nature of the company and the industry?
4. Given your understanding of CougCoffee and your analyses so far, can you help Jack to make
   the project decision regarding the company’s new product CM? That is, please compute the
   NPV and IRR of CougCoffee’s new project? Please show your computation steps clearly
   (show your inputs if using financial calculator or excel sheet).
   Should Jack take the new project? Why or why not (Please explain using the NPV and IRR
   rules separately)?