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 .

1. 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.

2. 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

3. 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.

4. 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

5. 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

6. 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

7. 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.