Starbucks in China Starbucks (SBUX) started expanding in China in 1999 and curre

Starbucks in China
Starbucks (SBUX) started expanding in China in 1999 and currently have nearly 7,000 stores across the country. But if you look closer at their Chinese operations, you see that they have been struggling since 2020 due to China’s massive COVID lockdowns and the rebuilding of Chinese chain Luckin Coffee. Even so, Starbucks till plans to aggressively open new stores. You will be doing an analysis relating to new stores in China.
Approximate cost of opening a Starbucks shop is 6,500,000 CNY.
Assume your shop will serve 60,000 orders in year 1 Starbucks projects customer growth of 4% per year until year 5.
Assume the average price per order is 60 CNY for year 1. Assume the average price per order will grow by 3% per year.
Variable costs are expected to be 75% of revenues.
Depreciation is 4% of capital investment costs.
The corporate tax rate in China is 25%. There is currently no tax on remittances or no limits on remittances. Assume Starbucks will remit 100% of cash flows.
Assume they will not pay additional tax to U.S for remitted funds either.
Assume the terminal value of the operation (value if they planned to sell) is 8M CNY after-tax, net of book value.
The April 2024 exchange rate was CNY/USD 0.13826.
Using 5 years of cash flows and the current exchange rate for 5 years, calculate the NPV and IRR of the project using a 12% rate.
Customer growth rate is based on the historical China growth rate; however, future customer growth could be much lower due to added competition. Assume there is a 60% chance it will be 4%, but a 40% chance it will actually fall to -3%. (Keep the price growth rate at 3%).
Salvage value is also uncertain. Assume there is a 65% chance the salvage value will be 8M CNY and a 35% chance it will only be 6M CNY.
What is the weighted NPV for your business? Should they invest in the business?