Lab 12: Long-Term Investment Analysis Due Date: Friday, April 15 (by 11:59 p.m.) Early in this course we analyzed several aspects of the operations of a hypothetical online grocery service operating in the Twin Cities. That firm is expanding its service into the suburbs to the east and north of St. Paul. They currently make 400 deliveries per week in these suburbs. Because delivery vans must drive across the metro area to make these deliveries, average delivery costs are high - $28 per order. The management team has been exploring the possibility of leasing a small vacant supermarket and converting it into a transshipment point for deliveries to customers in these eastern suburbs. If a transshipment point is established, orders will be shipped by semi from the warehouse to the transshipment point, where they will then be cross- docked into delivery vans. You have been asked to help analyze this decision. Conversion of the vacant supermarket into a transshipment facility will cost $390,000, and annual costs for rent, utilities, and insurance are estimated to be $150,000. Due to rapid changes in this business, the useful life of this facility is estimated to be only three years, and it will have no salvage value for the company. With the transshipment point, the company estimates they can lower average delivery costs by S7 per delivery - from $28 to $21. In the first year of operation, they expect to send an average of 600 orders per week through the facility. In the second and third years of operation for the facility, they expect orders to increase to 1,400 and then 2,000 orders per week (Be sure to convert weekly deliveries to an annual basis for your analysis, noting that there are 52 weeks in a year). You'll need to consider taxes in your analysis. The conversion costs can be depreciated over three years, using straight-line depreciation. Annual costs for rent, utilities, and insurance can be deducted from taxable income, but cost savings realized through operation of the facility will add to taxable income. The company's marginal tax rate (for federal and state taxes) is 40%. Finally, the venture capitalists who have recently invested in the company are expecting a 24% return on their investment, so that is the relevant cost of capital (discount rate) for your analysis. Present the results of your analysis in a short memo to Caitlyn Keo. The text should include an overview of your analysis and a clear recommendation on whether or not to go ahead with this investment project. Present your capital budgeting analysis in tabular form on an attached page. In addition to calculating the net present value of the project, you should also calculate the internal rate of return Finally, the most uncertain part of your analysis is the projected number of deliveries. A more conservative projection for future orders would be 500 per week in year one, 1.200 per week in year two and 1,600 per week in year three. Your report should include a discussion of what impact these more conservative projections would have on your recommendation
