As a recent hire of B-Well, your job is to evaluate whether the company should open a traditional grocery store in Astoria or start online shopping option instead. Before deciding which project to undertake, the Board of Directors has already agreed that they will hire a consultant to verify their decision. The consultant is charging $16, 580 total. They have also agreed that they will hire an NYC marketing agency to promote B-Well's reputation. They are not sure what the charge will be for the marketing services. For now, they just have to decide which project they will undertake. Brick & Mortar Store. B-Well Health Mart has to rent and renovate a space in Astoria. The estimates for the up-front renovation costs range from $2,250,000 to $2,650,000 to be depreciated over the life of the project using straight-line with a zero salvage value. There is a foreclosed warehouse in the area that their lenders are offering at a large discount since the lenders are losing money on it. The firm has not discussed specific numbers but they are expecting to negotiate rent to be $145, 000 per annum. Online Shopping. If B-Well Health Mart goes with online shopping instead, up-front investment is estimated to range between $2,000,000 to $2,500,000. Other capital investments will include large servers to support the flow of orders. These additional investments will amount to $1,000,000. They will still use the same warehouse, but just arrange it differently. Both Options. Based on the other store locations on Long Island and other local shops in Queens, sales are estimated to be $5, 750, 000 the first year of operation. The project is estimated to last for 6 years. That is how long the lender will allow then to use the warehouse at that rate. At that point, B-Well will run a whole new analysis to see whether they will move to a new location or shut down the store altogether. This is considered a pilot store. Sales are expected to grow at 5% per year and the estimates of the operating costs are as follows: Salaries for traditional store 25% of Sales Salaries for online store 30% of Sales Other operating expenses for traditional store 40% of Sales Other operating expenses for online store 30% of Sales Depreciation equipment & furniture Straight-line; zero salve value B-Well Health Mart has a capital structure consisting of 30% debt and 70% equity. The debt consists of loans from the Long Island Bank with an interest rate of 7.2% The cost of equity of the shareholders is 15%. The corporate tax rate is 35% The financial management team suggests that you use a discount rate of 4% on the projects since that is the average interest rate we earn on the CDs with Long Island Bank. Given this information, you have to decide which project the firm should undertake and convince the Board as to why. Keep in mind this is your one shot to impress the CFO with your work. It is not only the quantitative part of the analysis that will matter, but also the presentation and narrative to support your recommendation. Please provide a brief (one page maximum) summary at the beginning of the report and then support your claims throughout the report. Here are some questions you should consider in the report: 1. What are the relevant cash flows associated with each project? Please include pro forma income statements for the next 6 years. 2. Can you think of any spillover effects that should be considered? Are there any other non-quantifiable aspects that the other departments should consider as well? 3. Are there any other relevant cash flows that the management team has not mentioned to you which need to be considered? 4. What criteria should be used to evaluate the projects? Please explain the different methods you are familiar with and which you think should be used for this project. 5. Should we use the recommended 4% discount rate? 6. Which
investment project should be recommended to the Board of Directors?
