PLANET SPORT, a company with headquarters in Vincennes in the Val de Marne, is considering the development of a new activity: distribution of sports equipment in specialized sportswear stores. The first step in the development of this activity would be the opening of twelve new medium-sized stores throughout France. You have the following financial and operating information about the project:

• The opening of each new store involves an investment of 100 000 (excluding VAT) essentially for works on the shops themselves (painting, fitting, shelving etc..)

• The sales generated by each store are estimated at 105 000 in year 1 (T₁). Sales will grow by 15% in year 2, by a further 10% in year 3 before stabilizing in year 4.

• Variable costs will be 40% of annual sales. Fixed costs (salaries, rents, publicity) will be 30 000 for each store.

• The initial investment which is realized at the very start of the project (at time T₀) will be depreciated on a straight-line basis over a period of four years.

• The working capital requirement of each store is 10 500 for year 1. This working capital will be required immediately as soon as the stores open (ie. at time T₀). The working capital will then grow proportionally with sales (ie. it will increase by 15% from year 1 to year 2; by 10% from year 2 to year 3: it will stabilize in year4).

• The working capital of the company will not be recovered at the end of the project ie. the working capital position will not return to 0 at day 4. The company tried to sell the final working capital position at the end of the project but this was not possible.

• The company pays corporate taxes at a rate of 33 % (33.3333%)

• The return on investment that investors expect from this type of project is 12%

QUESTIONS :

The owners of Planet Sport have asked you to analyze the profitability of this project by responding to the following questions. You can answer their questions by looking at the operations of a single store : there is no need to calculate the totals for the whole project.

i)Calculate the free cash flow generated by a store for the four years of the project. Do not forget to indicate the free cashflow at time T₀too ! You must imperatively justify your answer by including the details of your calculations of depreciation, working capital and change in working capital.

ii)Calculate the net present value of the investment in a stores and the profitability index. Use the return on investment required for this calculation (12%).

iii)Calculate the payback period of the investment. Please give your answer in years and months.

iv)Give a conclusion about the project using the answers that you found in questions ii) and iii). Should the owners go ahead with the project or not ?

To present your calculations you can use the table on the next page. Be very careful about the columns that you use. Be sure to put all items (revenues or expenses, sources or uses) into the right column corresponding to the period in which they are recorded.

(in k) To TI 12 T3 T4 Sales Variables Fixed EBDIT Depreciation EBIT Interest Pre-tax Tax Net Income Working cap A W. Cap Op. Cashflow Fixed Inv. Inv. Cashflow Free cashflow Present value E PV free cash