During college, Blake found that she could turn her baking obsessions into a delivery business named Sleepless Brownies. Blake is the sole employee and operator of the business. After graduation, Blake invites her friend Taylor to invest in expanding the operation and share the work. A decade passes, and they have expanded their operations into a multinational chain. Blake and Taylor decide to go public with their company and hire the investment bank Solomon Sisters (SS) to advise with issuance and marketing of securities. SS estimate the company cash flows for the next few years will be as follows:

Cash Flow (in thousands USD)

Year 1 $5,000

Year 2 $6,750

Year 3 $8,450

Year 4 $9,500

Year 5 $10,000

After 5 years, cash flow is expected to grow at a rate of 1% a year. During its market research, SS found that a comparable food delivery firm Awake Smoothie went public at a value of $200 million. It was expected to have cash flows of $4 million in its first year and grow at a rate of 4% perpetually.

1. After 5 years, cash flow is expected to grow at a rate of 1% a year. During its market research, SS found that a comparable food delivery firm Awake Smoothie went public at a value of $200 million. It was expected to have cash flows of $4 million in its first year and grow at a rate of 4% perpetually.

2. The IPO for Sleepless Brownies is successful. Blake and Taylor decide to add additional retail locations and look into buying a chain of 5 small shops in the Midwest. The owner of the chain claims each shop will have cash flows of $250,000 per year, and they will sell the chain for $10 million. Assume cash flows are perpetual and start the year after the sale.

3. After the IPO, Blake and Taylor decide to expand to international markets in Europe. They plan to invest in local farms to source fresh, organic dairy. They narrow down their options to two alternatives:

[i] An investment in a Swiss farm would cost $10M today (year 0), $4M next year (year 1) and would increase capacity by 10,000 L per year from years 2-9. The variable cost of collecting milk at this location would be $30/liter. Every liter of milk makes 100 cookies. [Hint: nominal annual profits from the increased capacity would therefore be given by 10,000L x (P $30), where P is the price per 100 cookies]

[ii] An investment in a German farm would cost $8M today (year 0), $6M next year (year 1) and would increase capacity by 8,000 L per year from years 2-9. The variable cost of collecting milk at this location would be $25/liter.a. Assume the discount rate is 7% and the selling price of 1 cookie is $

1. If Sleepless Brownies can only pursue one of the options, how should the firm choose using NPV as the qualifying metric?

b. If the selling price of a cookie is again $1 and the firms cost of capital is 8%, how should the firm choose using IRR as the qualifying metric?

c. If the discount rate is 10%, find the price per cookie where it would make sense to invest in each alternative. That is, find the price at which the NPV is zero for each alternative. [HINT: You can use MS Excel Goal Seek to solve this problem]