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Marques Gourmet Coffee
Jose Ricardo Marques from San Pedro, Brazil is a fourth generation
coffee plantation grower. Jose’s great grandfather, Manual, started
with 1,000 acres of coffee bean trees in the fertile valley of Brazil in
the early 1900s. Through careful harvesting and production
processes, Manual was able to develop a high quality premium coffee
bean, which is used in the finest quality coffee blends. The family now
owns close to 50,000 acres of coffee trees and is a major supplier to
national companies specializing in gourmet coffee brands.
As Marques Coffee Beans has moved through the generations, family
members have assumed various roles in the company operations.
Jose, who grew up with the business, went to the Unites States for his
college undergraduate degree and stayed on to earn an MBA degree
with an emphasis in entrepreneurial studies. His goal has always been
to start his own coffee company in the United States.
Once Jose finished his college training and earned his masters degree,
the family gave him $1,000,000 to establish his business. Jose
decided to locate in New Orleans, which was reasonably close to his
supply link of coffee beans with direct air connections to his family
farms in San Pedro. Jose also thought the New Orleans area, with its
reputation for quality foods, would be an excellent local market to
introduce his new gourmet coffee.
Jose was considering three different approaches to get his coffee brand
produced and marketed in the New Orleans area. In the first option,
he wanted to tie into the current cultural music fad and identify his
coffee brand with the local music artists that were popular at the time.
Jose felt that he could get immediate success with large levels of sales
in the first two years, but as the fad dies off, his coffee sales would
also decline. By the end of five years, he may have to develop a new
brand or at least change the name of the current brand. This option
has some risks as Jose would have to invest a lot of resources and
time immediately to get acceptance of his coffee. He would have to
quickly develop an efficient production system, which would also
provide a high quality product desired by a wide diversity of users.
A second option Jose was considering was a go-slow approach and
develop a coffee brand which would tie in with the scheduled Pan
American games in four years. Brand sales would peak in the fourth
and fifth years and possibly decline after the games are over. This
option also had some risks. While it was not as critical to get the
production operations quickly up and running and capturing a market,
there was still a considerable cost in initial product development and a
commitment to high quality. There was also some risk that the coffee
brand would not gain the large market needed for overall success.
The third option was to just produce a gourmet coffee brand without
any connection to a cultural fad or event. Sales would be aimed at a
smaller segment of a target market with the idea of building up a
gradual loyal following. This option probably has the least amount of
risk if a general level of acceptance could be obtained. Changes could
be made throughout the time period to refine the production process
and product quality. There would not be the need for as large an
expenditure of resources either at the start of the five-year cycle or at
the end of the time period.
Jose wanted to consider the potential returns for each of these three
options over a five-year time period. In using a more conservative
approach, he wants to assume that the entire $1,000,000 of up front
money would be required at the start of the operation. $800,000
would be used for equipment purchases, which would be subject to
depreciation at $100,000 per year. The other $200,000 would be for
working capital requirements. Jose is fully anticipating that the
business will be successful and he will be continuing the operation for
many years to come. However, for purposes of this analysis he
decided to assume that at the end of 5 years he would terminate the
coffee production operations and sell all the equipment for 10% of its
original value.
Jose developed the following tables for projected revenues and
operating costs for each of the next five years for each of the three
options he was considering.
Projected Revenues
Years 1 – 5
Dollars in 1,000s
Year Option 1 Option 2 Option 3
1 $800 $200 $600
2 $1,300 $400 $700
3 $800 $800 $800
4 $500 $1,500 $900
5 $300 $1,800 $1,000
Projected Operating Costs
Years 1 – 5
Dollars in 1,000s
Year Option 1 Option 2 Option 3
1 $450 $150 $270
2 $650 $200 $300
3 $300 $350 $350
4 $150 $650 $400
5 $100 $750 $450
The projected tax rate for the company is 22%. Jose believes that any
of these coffee brand strategies should bring an 12% return on
investment.
Dialog:
Jose Marques has hired you as his Investment Banker. In your first
dialog post, write Jose a 400-500 word recommendation that
addresses two issues. First, Jose has asked, before evaluating the
capital budgeting metrics, that you eliminate one of the choices based
solely on your experience. What choice do you eliminate and what is
the single main reason? Second, calculate the NPV, IRR and Payback
for the remaining two choices. State which project to choose based on
a) the capital budgeting numbers, b) one additional financial reason
for the choice you prefer, and c) one key reason that argues against
the choice you don’t like.
In your second post, reply to a teammate that chose a different
investment option for Jose. In 150-250 words, with supporting
numbers, indicate why you arrive at a different view.

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