Your new roommate Mark just moved in! While getting to know each other, he shares with you that his family owns a company named Pota-To &Co. in Buenos Aires, Argentina. Mark mentions that their core business is to produce and deliver potato chips to supermarkets and mom & pop stores. As you mentioned the MicroMasters program you are taking, he shares with you some interesting information you start analyzing toghether. Pota-To &Co. is planning to expand its operations to cover other major Argentinian cities such as Cordoba and Rosario. This expansion will require Pota-To &Co. to set up a new distribution center and acquire new vehicles for last-mile distribution. Due to budget constraints, the company will only be able to expand to one city at a time. Therefore, Pota-To &Co. needs to decide if investing in Cordoba or Rosario makes more economic sense. The company is considering a time horizon of five years to make the decision. Assume the tax rate is 40% and the discount rate for Pota-To &Co. is 15%. Ignore inflation.

The table below shows the projections (incremental sales, COGS, operating expenses and depreciation) anticipated for expanding Pota-To &Co.'s operations to Cordoba in millions of Argentine pesos.

	Year 1	Year 2	Year 3	Year 4	Year 5
Sales	58	82	150	155	120
COGS	26	33	61	67	58
Gross Income	32	49	89	88	62
Operating Expenses	13	26	48	41	38
Operating Income (EBITDA)	19	23	41	47	24
Depreciation	6	6	6	6	6
Operating Income (EBIT)	13	17	35	41	18
Income Tax	5.2	6.8	14.0	16.4	7.2
Net Operating Profit After Taxes (NOPAT)	7.8	10.2	21	24.6	10.8

Expanding to Cordoba will require an investment of 30,000,000 Argentine pesos (to be paid in Year 0) to remodel the rented space for the distribution center and purchase the vehicles. Similarly, additional working capital will be required, but it comes in the second half of Year 1 after the remodeling is finished. That is why there is no working capital in Year 0. See table below:

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Depreciation	-	6	6	6	6	6
Net Capital Expenditures	-30	-	-	-	-	-
Net Working Capital Investment	-	-12	-20	-20	-7	47
Free Cash Flows	-30	1.8	-3.8	7	23.6

Note.- A negative number for the capital expenditure and working capital represents a cash outflow. The positive working capital cash flow in the final period may not equal the sum of the previous investments due to accounting assumptions, such as not collecting all receivables.

The company uses straight-line depreciation over 5 years. The terminal value is zero.

(The following question has been included for your benefit and is not graded.)

What are the projected Free Cash Flows for year 5 associated with expanding to Cordoba?

Be sure to enter all of you answers in Argentine pesos without commas or currency signs. Round your answers to the closest hundred thousands (e.g. if your answer is 32.6 million then you would enter 32.6 and if your answer is -24.1 million you would enter -24.1)

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Part 1

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The table below shows the projections (incremental sales, COGS, operating expenses and depreciation) anticipated for expanding Pota-To &Co.'s operations to Rosario in millions of Argentine pesos.

	Year 1	Year 2	Year 3	Year 4	Year 5
Sales	55	80	142	158	130
COGS	27	37	60	66	54
Gross Income
Operating Expenses	3	17	34	36	25
Operating Income (EBITDA)
Depreciation	10	10	10	10	10
Operating Income (EBIT)
Income Tax
Net Operating Profit After Taxes (NOPAT)

Mark tells you that the company uses straight-line depreciation over 5 years. Please, assume terminal value of zero.

Calculate the projected NOPAT (Net Operating Profit After Tax) for years 1-5.

Be sure to enter all of you answers in Argentine pesos without commas or currency signs. Round your answers to the closest hundred thousands (e.g. if your answer is 32.6 million then you would enter 32.6 and if your answer is -24.1 million you would enter -24.1)

What would be the projected NOPAT for year 1 associated with expanding to Rosario?

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What would be the projected NOPAT for year 2 associated with expanding to Rosario?

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What would be the projected NOPAT for year 3 associated with expanding to Rosario?

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What would be the projected NOPAT for year 4 associated with expanding to Rosario?

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What would be the projected NOPAT for year 5 associated with expanding to Rosario?

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Part 2

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Of course, an expansion to Rosario will represent an additional investment of 50,000,000 Argentine pesos (to be paid in Year 0) because the company needs to remodel the rented space for the distribution center and purchase the vehicles. Similarly, additional working capital will be required, but it comes in the second half of Year 1 after the remodeling is finished. That is why there is no working capital in Year 0. See table below:

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Depreciation	-	10	10	10	10	10
Net Capital Expenditures	-50	-	-	-	-	-
Net Working Capital Investment	-	-16	-30	-16	-8	41

Note.- A negative number for the capital expenditure and working capital represents a cash outflow. The positive working capital cash flow in the final period may not equal the sum of the previous investments due to accounting assumptions, such as not collecting all receivables.

Calculate the projected Free Cash Flows immediately and for years 1-5.

Be sure to enter all of you answers in Argentine pesos without commas or currency signs. Round your answers to the closest hundred thousands (e.g. if your answer is 32.6 millions then you would enter 32.6 and if your answer is -24.1 millions you would enter -24.1.)

What are the projected Free Cash Flows immediately associated with expanding to Rosario?

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What are the projected Free Cash Flows for year 1 associated with expanding to Rosario?

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What are the projected Free Cash Flows for year 2 associated with expanding to Rosario?

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What are the projected Free Cash Flows for year 3 associated with expanding to Rosario?

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What are the projected Free Cash Flows for year 4 associated with expanding to Rosario?

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What are the projected Free Cash Flows for year 5 associated with expanding to Rosario?

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Part 3

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Mark is thrilled with all the information you managed to provide him and is willing to share it with the family as soon as possible! In order to prepare a convincing presentation on the initiatives' feasibility, you need to calculate the Net Present Value (NPV) for both initiatives.

Be sure to enter all of you answers in Argentine pesos without commas or currency signs. Round your answers to the closest hundred thousands (e.g. if your answer is 32.6 million then you would enter 32.6 and if your answer is -24.1 millions you would enter -24.1)

What is the NPV for expanding Pota-To &Co.'s operations to Cordoba?

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What is the NPV for expanding Pota-To &Co.'s operations to Rosario?

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Part 4

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Which city should the company choose for expanding its operations?

Select the best answer

Cordoba

Rosario

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