Trader Markets is a grocery store with eight locations on Sea Island. They have been considering opening another location near downtown Manhattan.

During the most recent Board meeting, one of the Board members, Shelim Hans, who is also a chief technology officer of a local bank, suggested that they should offer online grocery shopping instead. Initially, the Board was very opposed to the idea because the current model has been very successful on Sea Island. The Board does agree with the advantages of offering online grocery shopping, but they arent just convinced by the ideas. They would like to see the numbers.

Doing both mutually exclusive projects is not an option. Before deciding which project to undertake, the Board of Directors has already agreed that they will hire a consultant to verify their decision. The consultant is charging $12,480 total. They have also agreed that they will hire a marketing agency in Manhattan to get the Traders reputation out there. They are not sure what the charge will be for the marketing services. Now, they just have to decide which project they will undertake.

Traditional Grocery Store:

Trader Markets has to rent and renovate a space in downtown Manhattan. The estimates for the up-front renovation costs range from $2,250,000 to $2,650,000 to be depreciated over the life of the project using straight-line with a zero salvage value. There is a foreclosed warehouse in the area that their lenders are offering at a large discount since the lenders are losing money on it. The firm has not discussed specific numbers but they are expecting to negotiate rent to be $145,000 per annum.

Online Grocery Shopping:

If the Trader Markets goes with the online shopping instead, up-front investment is estimated to range between $2,000,000 to $2,500,000. Other capital investments will include large servers to support the flow of orders. These additional investments will amount to $1,000,000. They will still use the same warehouse, but just arrange it differently.

QUESTION: Can you think of any spillover effects that should be considered? Are there any other non-quantifiable aspects that the other departments should consider as well?

Sales are expected to grow at 5% per year and the estimates of the operating costs are as follows: . . . Salaries for traditional store - 25% of Sales Salaries for online store 30% of Sales Other operating expenses for traditional store 40% of Sales Other operating expenses for online store 30% of Sales Depreciation- equipment & furniture Straight-line; zero salve value Trader Markets has a capital structure consisting of 30% debt and 70% equity. The debt consists of loans from the Sea Island Bank with an interest rate of 7.2%. The cost of equity of the shareholders is 15%. The corporate tax rate is 35%. The financial management team suggests that you use a discount rate of 4% on the projects since that is the avera interest rate we earn on the CDs with Sea Island Bank. Sales are expected to grow at 5% per year and the estimates of the operating costs are as follows: . . . Salaries for traditional store - 25% of Sales Salaries for online store 30% of Sales Other operating expenses for traditional store 40% of Sales Other operating expenses for online store 30% of Sales Depreciation- equipment & furniture Straight-line; zero salve value Trader Markets has a capital structure consisting of 30% debt and 70% equity. The debt consists of loans from the Sea Island Bank with an interest rate of 7.2%. The cost of equity of the shareholders is 15%. The corporate tax rate is 35%. The financial management team suggests that you use a discount rate of 4% on the projects since that is the avera interest rate we earn on the CDs with Sea Island Bank