$($In Thousands, except weekly sales$)$

Store #$300$

Corner of Big StreGrocery MiniCase: To Invest or Not?

Grocery Store Inc. $($GSI$)$ spends a great deal of money on capital expenditures, which

includes new stores, store remodels, warehouses and technology. You are in charge of

analyzing whether GSI should invest a significant amount of money into building and

operating a new store. The Controller of GSI, Ben Thair, has provided you with the

attached spreadsheet with partially completed information for a potential new store

located in Las Vegas, Nevada. In the Las Vegas market, Grocery Store Inc has a $33\%$

market share. With such a high market share any new store in this market will have some

negative impact on existing store sales. Information on this issue and some others has

been provided by a consultant, Dunn Thatt, who was hired by the President of GSI$$s Las

Vegas division, and was paid $$50,000$ for his consultant report.

In addition to the information on the attached spreadsheet, the following assumptions

should be considered:

$1.$ Discount Rate. GSI has estimated their weighted average cost of capital $($WACC$)$ at

$11\%.$ This rate should be assumed as a $$given$$ for the project.

$2.$ The decision to invest or not invest will consider NPV and IRR.

$3.$ The income tax rate is $40\%.$ Additionally, the city of Las Vegas has agreed to annual

property taxes at the flat rate of $$102,000$ per year, not growing.

$4.$ Project life. The store is estimated to last $20$ years.

$5.$ Depreciation. Depreciation for fixtures and equipment is $5-$year MACRS. My lecture

notes have the percent depreciation per year or you can get the yearly amounts via an

online search. For the building, use a $20-$year straight$-$line method for depreciation.

$6.$ The investment listed on the accompanying spreadsheet includes land $($not

depreciated$),$ building, fixtures, cash $($in the registers, and for corporate cash

holdings$)$ and inventory. The latter two, cash and inventory, are working capital

items. Working capital needs are estimated to grow at $2\%$ per year.

$7.$ Sales. The company CFO just paid a consultant $$50,000$ who analyzed sales for retail

food and drug chains. The study suggested the normal growth pattern for new stores

was that sales grew at $10\%$ for years $1$ to $5$ at which time growth will slow to $4\%$ for

years $6$ to $10($the next five years$).$ Thereafter $($years $11$ to $20),$ sales were to remain

flat and should not grow at all.

$8.$ Expenses. Some of the expenses are fixed and are assumed to not increase or

decrease over the next $20$ years. There are many expenses that are a percentage of

sales. They are highlighted in pink on the attached information.

$9.$ New Fixtures. New fixtures will need to be replaced at the $10$th year. It is estimated

that the cost to replace the fixtures and equipment will not increase as there will be

new technology in the material used to build the fixtures.

$10.$ Existing Store impact. There is an existing GSI store located ten miles from this

proposed new store. The consultant just reviewed the history with this type of

situation and determined that the new store will reduce sales $($revenues$)$ by $$300,000$

per year $($not growing$)$ at the existing store for all of the $20$ years while there will be

no offsetting negative impact on existing store$$s costs. Thus, they lose a net $$300,000$

annually at the old store if they open the new store.

$11.$ Corporate Overhead. The CFO and Chief Accountant both believe that new projects

should include an additional annual charge of $1\%$ of sales to cover the corporate

headquarter building fees and staff operating costs for headquarters.

$12.$ It is estimated by the CFO that the salvage value at the $20$th year for the building and

land will be $$5$ million.

$13.$ Management has set the following investment rules as guidelines to approve projects:

$$ NPV Positive

$$ IRR $($using expected return or WACC$)11\%$

This assignment has two parts that will be graded. The third part is good practice for

WACC computations.

Part One. Analyze the information and assumptions as given. Should GSI invest in this

project? Please justify your answer. Which investment rule$/$rules are more important and

why? Please include a copy of your narrative along with your detailed Excel model. The

format$/$appearance should be something you would hand to your board of directors but

can be bullet point in nature and not extremely verbose.

Part Two. Revise the assumptions based on potential changes to the projected numbers

and assumptions. For example, if you change the salvage value amount does it change the

answer? What items$/$assumptions matter enough to change your answer in Part One and

which ones don$$t$?$ You don$$t have to go crazy on this with tons of iterations but please

do find one or two items that would be material for the NPV$.$ This is in practice what

finance decision makers tend to want to know when asked to approve any project with a

positive NPV or when asking why a particular project does not have a positive NPV$.$

Be sure to include all of your models supporting