CRISP MARKETS Crisp Markets is a grocery store with eight locations on Long Island. They have been considering opening another location near downtown Brooklyn. During the most recent Board meeting, one of the Board members, Shelim Hans, who is also a chief technology officer of a local bank, suggested that they should offer online grocery shopping instead.

Initially, the Board was very opposed to the idea because the current model has been very successful on Long Island. However, Shelim Hans is convinced that social media marketing is increasing immensely and they may be able to tap into a different market. She also thinks that Brooklyn may be a great location since there are a lot of professionals and families, and driving isnt as convenient as on Long Island. The Board does agree with the advantages of offering online grocery shopping, but they arent just convinced by the ideas. They would like to see the numbers. The meeting became a bit more complex than the Board anticipated. They thought that they were going to agree or disagree on the new location (and most were for it) and now they have to decide whether they will open another location in downtown Brooklyn or branch out into online grocery shopping. They have all decided that doing both is not an option.

The next step is for them to decide which option they will choose. The Board contacts the management team and explains all the advantages and disadvantages of starting online grocery shopping in Brooklyn. The financial manager, Robert Sepharin, handles the bulk of the capital budgeting decisions for Crisp Markets. Lately, he has given the recent Finance hires with less industry experience the opportunity to get involved in the firms decision-making. This is one way of evaluating their talent for future promotion opportunities. While they already have a team that handles these decisions, they are going to carefully evaluate the reports of the more recent hires and incorporate any relevant information.

As a recent hire of Crisp Markets, your job is to evaluate whether the company should open a traditional grocery store in Brooklyn or start the online grocery shopping 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 $12,480 total. They have also agreed that they will hire a marketing agency in Brooklyn to get the Crisps reputation out there. They are not sure what the charge will be for the marketing services. Now, they just have to decide which project they will undertake.

Traditional Grocery Store. Crisp Markets has to rent and renovate a space in downtown Brooklyn. 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 Grocery Shopping. If the Crisp Markets goes with the 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.

Based on the other store locations on Long Island and other local grocery stores in Brooklyn, 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 them to use the warehouse at that rate. At that point, Crisp Markets will run a whole new analysis to see whether they will move to a new location or shut down the Brooklyn 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

Crisp Markets 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 chief financial officer 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 othernon-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?