For this assignment you will take on the role of Sadie (or Saul) McDollar who has been hired by Wacky Wines to assist with the evaluation of two expansion options. The first option is to open a new store in LA and the second option is to open a new store in Miami. Your job is to evaluate these two options and make a recommendation to the owners of Wacky Wines regarding which investment option should be pursued.
In order to complete the analysis use the information below and the two sets of provided pro forma financial statements (LA and Miami). Your memo should clearly state your recommendation regarding where Wacky Wines should open its next store. You must justify your decision using capital budgeting techniques (payback, discounted payback, NPV, IRR, and MIRR).
Expansion Information: Having been successful at prior expansions, Wacky Wines is hoping to expand again. This time, Wacky Wines is looking to expand by either opening a store in LA or Miami. From prior experience, Wacky Wines learned that it is difficult to expand into two new markets at the same time, and hence decided to only pursue one location at this time. The expansion in either location will be financed via a $500,000 loan. The proceeds will be used to purchase the necessary real estate, inventory, and supplies to open the store. In other words, the initial investment is $500,000 for either location.
The owners of Wacky Wines plan to sell all stores in 2030 and retire to the Bahamas. It is expected that the LA store will sell for $1.5 million while the Miami store will sell for $3 million in 2030.
Please use Wacky Wines weighted average cost of capital of 12% as the discount rate.
Key assumptions used to construct the pro forma statement projections:
1) Wacky Wines receives the $500,000 loan and uses the loan proceeds to purchase retail
space, inventory, furniture and fixtures, signage, etc. The 30 year loan has a fixed
interest rate of 5%.
2) For Miami, Wacky Wines’ sales are assumed to grow slowly (only 2% annually) for the
first several years. This is due Zika concerns causing a decline in tourism and wealthy residence moving out of Miami. However, once Zika is eradicated, sales growth is expected to increase to 20% per year and remain high.
4) The gross profit margin is assumed to be 5% lower in Miami since consumers in LA are
willing to pay higher prices for the same wines.
The owners of Wacky Wines are extremely well versed in finance. Hence, do not dedicate a great deal of space to explaining simple finance concepts in your write-up. However, the owners are looking for advanced analysis with evidence of critical thinking. The owners always appreciate well written memos that make appropriate use of correct grammar and spelling.
They are also very busy therefore memos written in a concise manner are better received.
However, if you have just one page of analysis, it will not be graded and you will earn a zero.
The course website will only allow you to submit one document in Microsoft word format. Thus, you will need to embed your excel tables and graphs in your word document before uploading your write-up to the course website.
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