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Ch 10: Waldo County. $90 Million Outlet Mall. NPV IRR

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Directions: Read the information given in the Waldo County mini-case at the end of Chapter 10 in the text (pages 266-267). Use that information to do all parts of the following. Your work should be typed in a Word document, with all necessary calculations done using an Excel spreadsheet.

Part 1: Use Excel to analyze the numbers given in the case. Make sure that you understand which numbers represent costs and which represent receipts. Also note the inflation assumption, which can be dealt with in either of two ways (which you use is your choice). In case you are not familiar with the term, straight line depreciation means that depreciable cost is equally divided among the number of years used, so that depreciation expense is the same each year (do not use the MACRS method). You need to calculate the following:

- The annual cash flows for years 0 - 17, including appropriate tax adjustments (note that years 0 - 2 will be negative)
- The NPV and IRR of the cash flows

Part 2: Use your analysis to prepare a written case report which can be presented to Mr. County. It should include the following:

- A brief introduction to the report
- A summary of the essential points of the case situation, including discussion of the risk involved
- Analysis of appropriate numbers from the case as shown in the spreadsheet
- A clear recommendation for action based on the analysis results

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Solution Summary

Your tutorial is a 848 word report that analyzes three scenarios: baseline, expected, and worst case. The models for each of these is in excel (attached) on a separate tab for each.

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Evaluation of $90 Million Outlet Mall to Intercept Tourists Heading Towards Maine

Introduction

The purpose of this report is to report the evaluation of a potential project to buy land and build an outlet mall to see if the project makes "financial sense." I will use two traditional techniques to evaluate the project. I will evaluate the net present value of the future cash flows (NPV) using cost of capital to discount the future cash flows back to the present. I will also compute the internal rate of return (IRR) which is an annualized rate of return expressed as a percent. These two measures will give a general sense, in today's dollars, the level of profit that the project will throw off given the assumptions made.

Financial Measures

This report shows three scenarios, one with baseline data, one with expected assumptions and one with worst case assumptions. Each of these is shown in Excel (attached) on a separate tab. The baseline data is the expected inflows and outflows in today's dollars. These amounts are not realistic if you expect inflation and so the expected case tab shows the baseline amounts increased by 2% per year for inflation. This increases both the construction costs, rents paid by the mall occupants, and the expenses of keeping up the mall ...

Solution provided by:
Carol Sargent, PhD
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  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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