Strategic Case Analysis
76
Solved Case # 5: Buying a Coffee-Stand
Business
A coffee-stand on the ground-floor of your thirty story
building is up for sale. It caters to workers in your
building, and three smaller buildings nearby. How would
you go about calculating the fair price for the stand?
Solution:
To find the valuation of any project, you should use the NPV
(Net Present Value) model. NPV is discussed in the chapter
on Advanced Frameworks.
So, you need to calculate the cash flow per year, and assume
that the operations will continue indefinitely, or for a long
time. So, it is a perpetuity (as opposed to an annuity), and
once you use the CAPM (Capital Asset Pricing Model) to
calculate the appropriate discount rate, you can calculate the
NPV of the perpetuity.
To calculate the cash flow, you need to estimate the revenues
and costs per year.
On quizzing the interviewer, you find out that the building has
2000 workers, and the nearby three smaller buildings have a
thousand, five hundred, and five hundred. So, the stand caters
to 2000 + 1000 + 500 + 500 = 4000 workers.
Then, you are told to assume a certain percentage drink coffee
every day. You assume 60% do, and 60% * 4000 = 2400
coffee drinkers. Then you debate with the customer how
many of these would rather walk to a nearby Starbucks and
how many would buy from the stand. Instead of providing a
direct answer, the interviewer gives a hint: the price of a
mocha at the stand is $2.00, and at Starbucks is $3.30.
Copyrighted Material
