The Reject Shop Capital Budgeting Information

Congratulations, you were hired as a financial analyst for The Reject Shop (TRS) following your studies at the University of Technology Sydney. TRS sells a variety of products at discounted prices including: food, cards, party, health, beauty, cleaning, storage, kitchenware, homewares, and pet care in 369 stores located in Australia. You fought off tough competition for the job, the recruitment team selected you for your personable character, analytical mind, ability to solve problems, and experience of working well in teams.

TRS is planning to open up to 25 stores in 2023 (Slide 9 of Announcement). One of these 25 new stores is proposed to be opened in the Western Sydney suburb of Liverpool. You have really impressed senior management with your finance knowledge, skills, and ability to get the job done. As a result, the Chief Financial Officer (CFO) has asked you to perform a capital budgeting analysis of the new Liverpool store to begin operating in 2023. In order to conduct your analysis, you will need to use the information below that has been provided to you by the accounting, finance, sales, and marketing departments. The information provided to you is detailed in the numbered paragraphs below (figures are in AUD, and based on projections in 2023, unless stated otherwise). It is your job as a financial analyst to decipher which information is relevant to the capital budgeting analysis. Upon completion, you will present your analysis to the Senior Management who will approve/decline investment in the new store.

2. For the proposed store, TRS will build a new store in Liverpool on vacant land that it currently owns, which is different to the majority of the TRS existing stores which are operated in leased space within shopping centres. Today in 2023, the cost to construct the building for the new store is $2.1 million. For simplicity and their internal reporting, TRSs management accountants assume all assets have an effective life of 12 years. TRS has $78 million in cash and plans to use $1.6 million of this amount to pay to construct the building. TRS will operate the new store for a ten-year period at which time they will sell the land and building containing the new store. According to your contact (Nick Kyrios) at the Australian Tax Office, the useful life of the new building (which will house the new Liverpool store) is 25-years.

3. To fund the remaining initial cost of constructing the new building for the new Liverpool store, TRS will borrow $500,000 today. TRS will obtain the funds from the Commonwealth Bank (CBA). The interest rate charged on the loan is 12% p.a., and the loan term is ten years. The first principal and interest payment occurs in Year 1.

4. The vacant land on which the new Liverpool store will be built, was purchased two years ago for $2 million. Today you have received a letter from the NSW Valuer General, the General values the vacant land at $2.50 million. In addition to the building costs, TRS will need to install fixtures and fittings (e.g., counters, shelves, etc) immediately. Today, for the new store to be operational the total cost of the fixtures and fittings is $300,000. Under tax ruling 2022/1, the effective life of fixtures and fittings is ten years.

5. Following a call with the NSW Valuer General and their commercial real estate team, they provide the following valuations of the vacant land, fixtures and fittings, and building which

will house the Year

The Fixtures and Fittings valuations provided in the table consulting report, which TRS purchased for $5,000 last week.

above were obtained from a

6. From the Announcement, across all of its stores, TRS reported annual sales of $774.6 million in 2022, and $778.7 million in 2021. In the first year of operation, TRS predict that annual sales from the new store in Liverpool will be equal to the average annual sales across all of its stores reported in 2022. For each subsequent year, TRS predict that annual sales for the Liverpool store will increase by 3% per annum.

7. TRS headquarters are located in Melbourne. The addition of the Liverpool store is not expected to affect expenses associated with the headquarters, which are today equal to $2 million per year. It is predicted that going forward the yearly TRS headquarter costs will increase by 1% per annum.

8. With customer preferences shifting towards online shopping, the cost of doing business is becoming increasingly expensive for companies to sell goods in their stores. TRS anticipate that throughout the entire project, the yearly cost of sales will equate to 55% of the annual sales generated by the new Liverpool store.

9. In addition to the cost of sales, two significant other expenses incurred by TRS are costs to operate each store and administration costs. The addition of the Liverpool store will increase TRS total yearly costs to operate all stores from $261 million to $262 million. The administrative costs associated with the Liverpool store will increase TRSs total annual administrative costs across all stores by $115,000 to $42 million. The store costs and administration costs are not expected to change over time.

10. The Announcement states that The Company has decided that no final dividend will be declared in FY22. However, beginning in 2025, TRS is anticipating paying a dividend of $0.15 per share every year going forward.

11. Trade payable required for the new Liverpool store is $150,000, taking TRS total trade payable figure to $57 million. The new Liverpool store will increase TRSs total inventory from the current level of $113 million to $113.3 million. The total accounts receivable for TRS will remain at $40 million whether the new store proceeds or not.

12. The company tax rate is 30%. The Finance team indicate that the required return for TRS is 11%.

TEAM LEADER NAME: Q1. Cash Flows at the start Q1. Cash Flows at the start TUTOR NAME: Year 3 TUTORIAL DAY AND TIME: Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 STUDENT NUMBER TEAM MEMBER NAME SIGNATURE (TEAM LEADER) Total Q2. Cash Flows over the life Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total Q3. Cash flows at the end Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total Total cash flow for each year Q4. NPV Recommendation Q5a. Measures Q5b. Advantage Q6. Share buyback Q7a. Insider trading Q7b. ETF Q7c. Profits \begin{tabular}{|c|c|c|c|} \hline Year & Land valuation & Fixturesandfittingsvaluation & Building valuation \\ \hline 2023 & $2,500,000 & $300,000 & $2,100,000 \\ \hline 2024 & $2,300,000 & $250,000 & $2,200,000 \\ \hline 2025 & $2,300,000 & $220,000 & $2,300,000 \\ \hline 2026 & $2,400,000 & $190,000 & $2,400,000 \\ \hline 2027 & $2,600,000 & $160,000 & $2,500,000 \\ \hline 2028 & $2,800,000 & $130,000 & $2,600,000 \\ \hline 2029 & $3,000,000 & $100,000 & $2,700,000 \\ \hline 2030 & $3,100,000 & $95,000 & $2,800,000 \\ \hline 2031 & $3,400,000 & $80,000 & $2,900,000 \\ \hline 2032 & $3,850,000 & $75,000 & $3,000,000 \\ \hline 2033 & $3,900,000 & $70,000 & $3,100,000 \\ \hline 2034 & $4,000,000 & $60,000 & $2,800,000 \\ \hline 2035 & $3,900,000 & $50,000 & $2,700,000 \\ \hline \end{tabular} TEAM LEADER NAME: Q1. Cash Flows at the start Q1. Cash Flows at the start TUTOR NAME: Year 3 TUTORIAL DAY AND TIME: Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 STUDENT NUMBER TEAM MEMBER NAME SIGNATURE (TEAM LEADER) Total Q2. Cash Flows over the life Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total Q3. Cash flows at the end Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total Total cash flow for each year Q4. NPV Recommendation Q5a. Measures Q5b. Advantage Q6. Share buyback Q7a. Insider trading Q7b. ETF Q7c. Profits \begin{tabular}{|c|c|c|c|} \hline Year & Land valuation & Fixturesandfittingsvaluation & Building valuation \\ \hline 2023 & $2,500,000 & $300,000 & $2,100,000 \\ \hline 2024 & $2,300,000 & $250,000 & $2,200,000 \\ \hline 2025 & $2,300,000 & $220,000 & $2,300,000 \\ \hline 2026 & $2,400,000 & $190,000 & $2,400,000 \\ \hline 2027 & $2,600,000 & $160,000 & $2,500,000 \\ \hline 2028 & $2,800,000 & $130,000 & $2,600,000 \\ \hline 2029 & $3,000,000 & $100,000 & $2,700,000 \\ \hline 2030 & $3,100,000 & $95,000 & $2,800,000 \\ \hline 2031 & $3,400,000 & $80,000 & $2,900,000 \\ \hline 2032 & $3,850,000 & $75,000 & $3,000,000 \\ \hline 2033 & $3,900,000 & $70,000 & $3,100,000 \\ \hline 2034 & $4,000,000 & $60,000 & $2,800,000 \\ \hline 2035 & $3,900,000 & $50,000 & $2,700,000 \\ \hline \end{tabular}