West End Motors was a franchised dealership employing about 60 people in a town of 45,000 in Western Canada. In late 1980, W.B. Wilson, the President and General Manager, was considering a proposal for a new body shop facility. An opportunity to buy a suitable piece of land near the dealership had just come to Wilson's attention, and he decided it was time to carefully consider making a major investment in a body shop. On the basis of prior negotiations with the vehicle manufacturer, Wilson was sure that the manufacturer would not provide financing or active support for the new venture. The current body shop at West End Motors was in a leased building located about one mile from the dealership. This building provided room for five metal working stalls. Two preparation stalls and a small paint booth were located in the mechanical repair area of the main dealership. There was very little storage space, at the body shop location, either for parts and supplies or for damaged vehicles. The lease payments were $400 per month, and did not include heat, light, insurance and business tax. Eight men plus a foreman were employed at the body shop. The old body shop was usually quite busy. Body shop sales in 1980 were running at just under $200,000 annually, with an almost 60 per cent gross and a net earnings after tax of $30,000. The rate of turnover of staff was quite high. Competition for body shop business in the dealerships trading area came primarily from another franchised dealer with a 20-stall facility. Three other dealers ran small shops, but were not particularly aggressive in soliciting business. In addition, there were a variety of small independent shops operating in the area. The new body shop proposal had been developed by Wilson and his body shop foreman with the help of a local building contractor. Wilson was toying with the idea of attempting to change the public image of the body shop business, at least with respect to his own dealership. As a result, the new proposal involved some significant innovations to current body shop facility designs. These changes were planned to create a cleaner, more comfortable and more pleasant environment for both the staff and the customers. Specifically, the proposal included a carpeted, well-decorated reception area for customers, complete with washroom facilities, a fully-equipped office for use by insurance adjusters, a heated appraisal area, locker and lunch room facilities with modern washrooms and showers for employees, hot and cold water together with air lines in every stall and an efficient air control system in the building to reduce dust levels for both the benefit of employees and to ensure top quality paint work. The painting area would be separated from the metal working area by a fire wall, and included a paint booth large enough to accommodate the largest trucks as well as a conventional drying oven for cars. An under-the-floor frame straightening apparatus would be available in six of the metal working stalls. These features were not without their price tag, and Wilson in the proposal raised the estimated cost was aware that their inclusion considerably. Wilson and his foreman believed that sufficient business could be attracted to a really good facility to keep 20 stalls busy, seven of which would be in the paint section. A total of 12,000 square feet would be required to provide this working space with parts storage and the other features described earlier. The land which was currently available was priced at $100,000 for 1.23 acres, and the contractor estimated that the building would cost about $50 per square foot to construct, or a total of $600,000. Equipment for the building, including rails in the floor for frame straightening, wiring, fencing, and a road sign would cost about $50,000. The new truck booth and an air compressor for the entire shop would cost an additional $150,000. The capital cost allowance rates for taxes were five per cent for the building and 20 per cent for the equipment expenditures of $200,000. The corporate tax rate was 46 per cent. Incremental working capital would be zero. The hourly labour charge for body shop work billed was $32.00. Wage and benefit costs were $14.48 per hour. Parts and supply sales averaged $0.75 for every dollar of labour charged and earned a gross margin of 27 per cent. Consequently, the total gross revenue per labour hour charged was estimated at $56.00 ($32.00 labour plus 0.75 of $32.00 or $24.00 parts and supplies). The variable costs per labour charged were $32.00 ($14.48 hourly labour cost, plus 0.73 of $24.00 or $17.52 parts and supply costs). In addition, the following annual cash expenses were anticipated: Supervision and Clerical Repairs and Maintenance Utilities, Business and Property Taxes and Insurance Advertising $ 70,000 20,000 50,000 20,000 Total $160,000 Capacity operations for the shop were estimated for planning purposes to be 13 stalls for 2,000 hours a year, or 26,000 saleable hours. The revenue from the paint stalls was included in the estimate of parts and supply sales. Wilson was not sure how long it would take to attract sufficient business to operate the new facility at capacity. He realized that the new shop would have to absorb more overhead than many of his competitors, but he also believed that productivity would be higher in more convenient, pleasant working conditions, and that customers would prefer to do business in the cleaner, quieter and more attractive environment that the new shop would provide. Wilson estimated that the facility would operate at 60 per cent capacity in 1981, 70 per cent capacity in 1982, 80 per cent capacity in 1983, 90 per cent capacity in 1984, and 100 per cent thereafter. In 1991, after 10 years, a new facility and new equipment would be required. Wilson expected to be able to sell the land for $100,000 and the building for $300,000. The equipment would be worthless. In evaluating the investment, given probable sources of financing and their costs, Wilson decided to use a cut-off rate of 20 per cent. West End Motors Assume depreciation is on a straight-line basis to an estimated zero salvage value For the current body shop, the $30,000 "net earnings after tax" to which the authors refer is actually the shop's projected annual ATOPCF for the next 10 years Re-run your original analysis assuming an inflation rate of 5% Re-run your original analysis (without inflation) assuming: o There is an initial networking capital (NWC) investment of $50,000 and the annual NWC commitment is estimated to be 8% of projected revenue Re-run your inflation-adjusted analysis incorporating the NWC assumptions above West End Motors was a franchised dealership employing about 60 people in a town of 45,000 in Western Canada. In late 1980, W.B. Wilson, the President and General Manager, was considering a proposal for a new body shop facility. An opportunity to buy a suitable piece of land near the dealership had just come to Wilson's attention, and he decided it was time to carefully consider making a major investment in a body shop. On the basis of prior negotiations with the vehicle manufacturer, Wilson was sure that the manufacturer would not provide financing or active support for the new venture. The current body shop at West End Motors was in a leased building located about one mile from the dealership. This building provided room for five metal working stalls. Two preparation stalls and a small paint booth were located in the mechanical repair area of the main dealership. There was very little storage space, at the body shop location, either for parts and supplies or for damaged vehicles. The lease payments were $400 per month, and did not include heat, light, insurance and business tax. Eight men plus a foreman were employed at the body shop. The old body shop was usually quite busy. Body shop sales in 1980 were running at just under $200,000 annually, with an almost 60 per cent gross and a net earnings after tax of $30,000. The rate of turnover of staff was quite high. Competition for body shop business in the dealerships trading area came primarily from another franchised dealer with a 20-stall facility. Three other dealers ran small shops, but were not particularly aggressive in soliciting business. In addition, there were a variety of small independent shops operating in the area. The new body shop proposal had been developed by Wilson and his body shop foreman with the help of a local building contractor. Wilson was toying with the idea of attempting to change the public image of the body shop business, at least with respect to his own dealership. As a result, the new proposal involved some significant innovations to current body shop facility designs. These changes were planned to create a cleaner, more comfortable and more pleasant environment for both the staff and the customers. Specifically, the proposal included a carpeted, well-decorated reception area for customers, complete with washroom facilities, a fully-equipped office for use by insurance adjusters, a heated appraisal area, locker and lunch room facilities with modern washrooms and showers for employees, hot and cold water together with air lines in every stall and an efficient air control system in the building to reduce dust levels for both the benefit of employees and to ensure top quality paint work. The painting area would be separated from the metal working area by a fire wall, and included a paint booth large enough to accommodate the largest trucks as well as a conventional drying oven for cars. An under-the-floor frame straightening apparatus would be available in six of the metal working stalls. These features were not without their price tag, and Wilson in the proposal raised the estimated cost was aware that their inclusion considerably. Wilson and his foreman believed that sufficient business could be attracted to a really good facility to keep 20 stalls busy, seven of which would be in the paint section. A total of 12,000 square feet would be required to provide this working space with parts storage and the other features described earlier. The land which was currently available was priced at $100,000 for 1.23 acres, and the contractor estimated that the building would cost about $50 per square foot to construct, or a total of $600,000. Equipment for the building, including rails in the floor for frame straightening, wiring, fencing, and a road sign would cost about $50,000. The new truck booth and an air compressor for the entire shop would cost an additional $150,000. The capital cost allowance rates for taxes were five per cent for the building and 20 per cent for the equipment expenditures of $200,000. The corporate tax rate was 46 per cent. Incremental working capital would be zero. The hourly labour charge for body shop work billed was $32.00. Wage and benefit costs were $14.48 per hour. Parts and supply sales averaged $0.75 for every dollar of labour charged and earned a gross margin of 27 per cent. Consequently, the total gross revenue per labour hour charged was estimated at $56.00 ($32.00 labour plus 0.75 of $32.00 or $24.00 parts and supplies). The variable costs per labour charged were $32.00 ($14.48 hourly labour cost, plus 0.73 of $24.00 or $17.52 parts and supply costs). In addition, the following annual cash expenses were anticipated: Supervision and Clerical Repairs and Maintenance Utilities, Business and Property Taxes and Insurance Advertising $ 70,000 20,000 50,000 20,000 Total $160,000 Capacity operations for the shop were estimated for planning purposes to be 13 stalls for 2,000 hours a year, or 26,000 saleable hours. The revenue from the paint stalls was included in the estimate of parts and supply sales. Wilson was not sure how long it would take to attract sufficient business to operate the new facility at capacity. He realized that the new shop would have to absorb more overhead than many of his competitors, but he also believed that productivity would be higher in more convenient, pleasant working conditions, and that customers would prefer to do business in the cleaner, quieter and more attractive environment that the new shop would provide. Wilson estimated that the facility would operate at 60 per cent capacity in 1981, 70 per cent capacity in 1982, 80 per cent capacity in 1983, 90 per cent capacity in 1984, and 100 per cent thereafter. In 1991, after 10 years, a new facility and new equipment would be required. Wilson expected to be able to sell the land for $100,000 and the building for $300,000. The equipment would be worthless. In evaluating the investment, given probable sources of financing and their costs, Wilson decided to use a cut-off rate of 20 per cent. West End Motors Assume depreciation is on a straight-line basis to an estimated zero salvage value For the current body shop, the $30,000 "net earnings after tax" to which the authors refer is actually the shop's projected annual ATOPCF for the next 10 years Re-run your original analysis assuming an inflation rate of 5% Re-run your original analysis (without inflation) assuming: o There is an initial networking capital (NWC) investment of $50,000 and the annual NWC commitment is estimated to be 8% of projected revenue Re-run your inflation-adjusted analysis incorporating the NWC assumptions above
