CASE 1: HOPPIN BOOKS Skye is an accountant for the Steeltown Public Library. She has begun preparing a report for a potential acquisition of a private bookstore but needs your help. The librarys directors believe the building could be a great second library location which residents have been requesting for years (the seats in the current library fill up quickly during peak hours). Here is what Skye has prepared so far: Grasshopper Corporation was originally started in Steeltown in the mid-1970s. The small bookstore, named Hoppin Books, achieved moderate success under Walt Singer, but the company really blossomed under his son, Tyler. Through a bank loan, Tyler acquired the small building housing the bookstore and slowly expanded into adjacent units. In the early 2000s, Tyler started a website which immediately boosted sales. However, as older customers visited the establishment less frequently in coming years, the need for a large physical location declined. Younger customers opted to place their orders online and pick them up later or simply had them shipped to their homes. Of course, this also meant competition from other online booksellers like Amazon and Chapters. Grasshoppers advantage was that the warehouse was usually close to local customers, so they could get their book more quickly (this edge has been disappearing as e-tailers cut their delivery times). Over the years, Tyler has frequently donated books to the library and the entities have collaborated to host reading days for kids. The library has even held summer reading contests which awarded schoolkids a $10 gift card if they reached the goals. Earlier this year, Tyler casually mentioned to a library director that he was considering closing the physical location and renting out the building to another business. The director, Lin, was quite fond of reading days at the bookstore and immediately questioned if he would consider selling the 60-year old Steeltown landmark. The next week, in a phone call with Lin and Skye, Tyler offers a couple of proposals. His preferred proposal is that the bookstore buys the building based on a 40-year business valuation (the bank is currently offering a 4% rate). Tyler believes that book sales can grow steadily at 2% per year due to Steeltowns recent population growth, but is willing to keep the final 20 years as flat growth as a favor to the library. He points out that expenses have declined recently as he has been able to cut wages as result of excess availability of labor due to cuts at local steel mills. In the next five years, the minimum wage will gradually rise from $10.25 to $14.10 per hour. Despite this, he expects all costs to increase only 1% per year for the next 40 years. If the library chooses to purchase the building, Tyler will donate the current inventory (priced to sell at $7,900) to the library. When asked if he has cut his own employee base, Tyler admits that he has but only because his online business permits increased efficiency. Tyler continued to disclose his current financials: Hoppin Books Income Figures for the Last 12 Months Sales* $152,200 Salary expense** 32,800 Marketing expense 12,390 Rent expense*** 18,000 Cost of Goods Sold**** 30,420 Tax expense 4,550 Remember to check the starred notes below for additional details! Tylers other proposal is for the library lease the building from him. He has suggested that the lease start next January (6 months from now) at $3,500 per month. From then on, the lease will increase by $100 a month each year until year 25, then remain steady until the end of the lease. Skye estimates the fair market value of the building to be $1 million. She conservatively expects the value to increase by 1% annually for the next 40 years. However, there will also be maintenance costs. Skye expects them to start at $10,000 per year and increase 5% annually. She notes that this might be an advantage of leasing as opposed to buying. Prepare a business report for Skye. Discuss all relevant issues, including pros and cons of each option. Outline any questions/inquiries which should be directed to Tyler and why they are important to Skyes decision. * Sales totalled $154,100 in the prior year, and $153,700 the year before that. ** Tyler usually handled everything at the warehouse (online orders, stocking the physical location, and receiving orders from suppliers). The bookstore had a full-time employee and a part-time employee (typically three or four hours a week). *** The entire rent expense was for the warehouse. **** Tyler believes he marks up his inventory to thrice his cost on average. However, he does buy new popular titles in bulk and they usually fly off the shelves.