Question

A retail coffee company is planning to open 105 new coffee outlets that are expected to generate, in total, $15 million in free cash flows per year, with a growth rate of 3.8% in perpetuity. If the coffee company's WACC is 9.3%, and the cost of the expansion is $183 million, what is the NPV of this expansion? (Round to three decimal places.)

Answer 1

The NPV of the expansion for the retail coffee company is calculated by discounting the expected cash flows at the WACC minus growth rate. The result is $89.727 million after subtracting the cost of the expansion.

Step-by-step explanation:

To calculate the Net Present Value (NPV) of the expansion for the retail coffee company, we will use the formula for the present value of a perpetuity: Present Value = Cash Flows / (WACC - Growth rate). This will be done by dividing the company's expected free cash flows by the difference between the Weighted Average Cost of Capital (WACC) and the growth rate.

The calculation is as follows:
NPV = ($15 million / (0.093 - 0.038)) - $183 million = ($15 million / 0.055) - $183 million = $272.727 million - $183 million

After rounding to three decimal places, we find the NPV to be:

$89.727 million