Case Study: Revive & Renew

Revive & Renew Pvt. is considering opening an Express Spa Centre within the terminal buildings of three very large international airports in Ghana. Each centre would offer a range of short duration (30 - 90 minutes) treatments designed to meet the needs of long haul international travellers, especially those in transit between flights. The company has already conducted and paid for a research at a cost of 500,000 to assess how much to charge customers.

The Airport owners (who own all three airports and a number of others in Ghana and West Africa) are prepared to rent out appropriate floor space for an initial 5 year period. Rental at each location will be contractual for the full five year period and no refund is payable should Revive and Renew Pvt. withdraw.

Revive & Renew will have to meet all capital investment and operating costs for the Spa Centre.

Revive & Renew is currently financed via a mix of common stock (equity) and long term borrowings (debt). Equity accounts for some 40% of the capital structure and the recent dividend paid has averaged 10%. The remaining 60% of the structure is debt with a fixed rate (post tax) of 8%.

Company policy is to depreciate new capital assets over their useful life on a straight line basis taking account of any relevant residual values at the end of this period.

Relevant capital investment, forecast revenues and operating cost data is set out overleaf.

Revive & Renew Ltd: Selected Financial Data

1. Forecast Revenues

No. of Treatments per week

Airport A200

Airport B180

Airport C150

Average Treatment price25

It is anticipated that spa will operate for 50 weeks per year, the remaining 2 weeks being used for "deep" cleaning and routine maintenance.

1. Forecast Costs (Applicable to each of the 3 Airport locations)

Average Variable Cost of Treatment10

Annual Fixed Costs

Floor Space Rental50,000

Other10,000

1. Investment Costs

Centre "Outfitting"25,000

Centre Spa Equipment125,000

Required

As a group:

Prepare a report, in a format suitable for the directors of the company which recommends which if any of the three locations should be progressed.Your report should include:

1. An executive summary identifying the key issues arising from all of your analyses (including those in element 1) and your overall recommendation.

2. Financial analysis and interpretation, including:

• Annual profit before taxation, but taking account of any relevant depreciation charge.
• Annual cash flows and overall net annual cash inflow.
• "Simple" Payback Period.
• An initial NPV assuming the "forecast case environment."
• Appropriate supplementary capital investment appraisal calculations
• Appropriate NPV sensitivity calculations

3. An evaluation of the potential impact of external and internal business context factors on the investment decision.

4.An appendix (maximum 500 words) which critically evaluates and illustrates by reference to your work, the strengths and weakness of the financial techniques you have employed.