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Accounting, Finance, SPSS
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A Short Finance Case with Four Questions. Accounting, Finance Essay (Essay Sample)

Instructions:

This is a small case which relates to basic finance information.
There are only four questions, and in fact, no specific requirement for the pages.
The only requirement is to answer questions accurately. That means you don't need to do the extension works such as writing the background about this case. So, even though I chose 5 pages, you don't need to write it full if all questions are illustrated very clear. Also, if you do far more than 5 pages, please leave me a message to revise it.
In the end, A summary page needs to be attached which is no more than 2/3 page. You only need to conclude and summarize this paper.
If you have any confusion about this paper, please feel free to ask me any questions about it. I'll reply you ASAP when I receive your message.
THANKS A LOT!

 

    Crisp Markets is a grocery store with eight locations on Long Island. They have been considering opening another location near downtown Brooklyn. 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 Long Island. However, Shelim Hans is convinced that social media marketing is increasing immensely and they may be able to tap into a different market. She also thinks that Brooklyn may be a great location since there are a lot of professionals and families, and driving isn’t as convenient as on Long Island. The Board does agree with the advantages of offering online grocery shopping, but they aren’t just convinced by the ideas. They would like to see the numbers. The meeting became a bit more complex than the Board anticipated. They thought that they were going to agree or disagree on the new location (and most were for it) and now they have to decide whether they will open another location in downtown Brooklyn or branch out into online grocery shopping. They have all decided that doing both is not an option.   

The next step is for them to decide which option they will choose. The Board contacts the management team and explains all the advantages and disadvantages of starting online grocery shopping in Brooklyn. The financial manager, Robert Sepharin, handles the bulk of the capital budgeting decisions for Crisp Markets. Lately, he has given the recent Finance hires with less industry experience the opportunity to get involved in the firm’s decision-making. This is one way of evaluating their talent for future promotion opportunities. While they already have a team that handles these decisions, they are going to carefully evaluate the reports of the more recent hires and incorporate any relevant information. 

As a recent hire of Crisp Markets, your job is to evaluate whether the company should open a traditional grocery store in Brooklyn or start the online grocery shopping instead. 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 Brooklyn to get the Crisp’s 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.  

Crisp Markets has to rent and renovate a space in downtown Brooklyn. 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 Crisp 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.

Based on the other store locations on Long Island and other local grocery stores in Brooklyn, sales are estimated to be $5,750,000 the first year of operation. The project is estimated to last for 6 years.  That is how long the lender will allow them to use the warehouse at that rate. At that point, Crisp Markets will run a whole new analysis to see whether they will move to a new location or shut down the Brooklyn store altogether. This is considered a pilot store.  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

Crisp Markets has a capital structure consisting of 30% debt and 70% equity.  The debt consists of loans from the Long 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 average interest rate we earn on the CDs with Long Island Bank.

Given this information, you have to decide which project the firm should undertake and convince the Board as to why. Keep in mind this is your one shot to impress the chief financial officer with your work. It is not only the quantitative part of the analysis that will matter, but also the presentation and narrative to support your recommendation. Please provide a brief (one page maximum) summary at the beginning of the report and then support your claims throughout the report.

 Here are some questions you should consider in the report:

1. What are the relevant cash flows associated with each project? Please include pro-forma income statements for the next 6 years.

2. 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?

3. Should we use the recommended 4% discount rate? 

4. Which investment project should be recommended to the Board of Directors?

source..
Content:


A Short Finance Case with Four Questions
Author’s Name
Institutional Affiliation
Table of Content
TOC \o "1-3" \h \z \u Introduction PAGEREF _Toc25952883 \h 31. Relevant Cash Flows for Projects and Pro-Forma Income Statements PAGEREF _Toc25952884 \h 31.1. Project A Relevant Cash Flows PAGEREF _Toc25952885 \h 31.2. Project B Relevant Cash Flows PAGEREF _Toc25952886 \h 31.3. Project A Pro-Forma Income Statements PAGEREF _Toc25952887 \h 41.4. Project B Pro-Forma Income Statements PAGEREF _Toc25952888 \h 42. Spillover Effects and Non-Quantifiable Aspects PAGEREF _Toc25952889 \h 42.1. Spillover Effects PAGEREF _Toc25952890 \h 42.2. Non-Quantifiable Aspects PAGEREF _Toc25952891 \h 53. Discount rate PAGEREF _Toc25952892 \h 64. Recommended Project to Board of Directors PAGEREF _Toc25952893 \h 6Summary PAGEREF _Toc25952894 \h 7References PAGEREF _Toc25952895 \h 8Appendixes PAGEREF _Toc25952896 \h 9Appendix A: Project A After Tax Total Cash Flows PAGEREF _Toc25952897 \h 9Appendix B: Project B After Tax Total Cash Flows PAGEREF _Toc25952898 \h 9Appendix C: Pro-Forma Income Statements for Project A of Traditional Grocery Store PAGEREF _Toc25952899 \h 10Appendix D: Pro-Forma Income Statements for Project B of Online Grocery Store PAGEREF _Toc25952900 \h 10Appendix E: NPV, IRR and Discounted Payback Period for Project A of Traditional Grocery Store PAGEREF _Toc25952901 \h 11Appendix F: NPV, IRR and Discounted Payback Period for Project B of Online Grocery Store PAGEREF _Toc25952902 \h 11
A Short Finance Case with Four Questions
Introduction
Organizations invest financial capital on different expansion projects to achieve sustainable competitive advantage in the market. The expansion policy is important for companies to ensure that products and services are offered to more customers and the policy also contributes toward achievement of high revenues and profitability. The report is developed and presented as a new recruit at the budgeting department of Crisp Markets. The grocery store chain has considered an expansion opportunity to open a new store at a location in downtown, Brooklyn. Another proposal is presented by CTO (Chief Technology Officer). The proposal recommends opening an online grocery shopping platform for customers. In order to make effective decision, it is essential to evaluate both options. As a new recruit, project A of traditional grocery store and project B of online grocery shopping are evaluated from different perspectives in this report.
1. Relevant Cash Flows for Projects and Pro-Forma Income Statements

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