Lancers Retail Stores is considering the opening of a new store in Des Moines. An analyst for
Question:
Lancers Retail Stores is considering the opening of a new store in Des Moines. An analyst for the company has created the following simple model:
- Initial Investment at t=0, $1.2M
- Life of store, 10 years
- Revenues, $1.3M
- Variable cost rate, 60%
- Fixed costs, (inc., $50K of depreciation) of $300K per year
- Expected tax rate 18.0%
- There are no net working capital implications
- The appropriate risk adjusted discount rate is 10.0%
The above values are base case values. The analyst has also said the three assumptions above that are the most uncertain are Revenues, Variable Cost Rate, and the Tax Rate - the rest of the assumptions are easy to estimate in comparison and the analyst has greater certainty as to those values.
For these three assumptions the analysts has created the following additional analysis:
Assumption | Worse Case | Best Case |
Revenues | 5% less than Base | 5% more than Base |
Variable cost rate | 65% of revenues | 58% of revenues |
Tax Rate | 20.0% | 16.0% |
Required: Create a scenario analysis of this project showing worst/base/best cases using the NPV, IRR and PI methods.
Managerial Accounting
ISBN: 978-1259024900
9th canadian edition
Authors: Ray Garrison, Theresa Libby, Alan Webb