Question
HomeGrown Company is a chain of grocery stores that are similar to indoor farmer's markets, providing fresh, local produce, meats, and dairy products to consumers
HomeGrown Company is a chain of grocery stores that are similar to indoor farmer's markets, providing fresh, local produce, meats, and dairy products to consumers in urban areas. HomeGrown is considering opening several stores in a new city, and has proposals from three contractors (Alpha, Beta, and Gamma companies) who would like to provide buildings for the new stores.
The amount of expected revenue from the stores will depend on the design of the contractor. For example, if HomeGrown decides on a more open floor plan, with less shelf space for products, revenue would be lower overall. However, if HomeGrown decides on a very crowded floor plan, it may lose customers who appreciate a more open feel.
As the project manager for HomeGrown, you are responsible for deciding which if any of the proposals to accept. HomeGrown's minimum acceptable rate of return is 20%. You receive the following data from the three contractors:
Proposal | Type of Floor Plan | Investment if Selected | Residual Value |
---|---|---|---|
Alpha | Very open, like an indoor farmer’s market | $1,472,000 | $0.00 |
Beta | Standard grocery shelving and layout, minimal aisle space | $5,678,900 | $0.00 |
Gamma | Mix of open areas and shelving areas | $2,525,960 | $0.00 |
You have calculated estimates of annual cash flows and average annual income from customers for each of the three contractors' plans. You believe that the annual cash flows will be equal for each of the 10 years for which you are preparing your capital investment analysis. Your conclusions are presented below.
Proposal | Estimated Average | |
---|---|---|
Annual Income | Estimated Average | |
(after depreciation) | Annual Cash Flow | |
Alpha | $302,054 | $351,145 |
Beta | $272,019 | $475,608 |
Gamma | $626,564 | $704,490 |
You begin by trying to eliminate any proposals that are not yielding the company’s minimum required rate of return of 20%. Complete the table below, and decide whether Alpha, Beta, and/or Gamma should be eliminated because the average rate of return of their project is less than the company's minimum required rate of return.
Complete the table below. Enter the average rates of return as percentages rounded to two decimal places.
Proposal | Annual Income Average Investment | Average Rate of Return | Accept or Reject? | |
---|---|---|---|---|
Estimated Average | ||||
Alpha | Accept | |||
Beta | Reject | |||
Gamma | Accept |
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