FNCE623 - A Grocery Store Owner in Vancouver British Columbia

Assignment Task

A grocery store owner in Vancouver, British Columbia, Mr. Specter has been very successful for over 35 years. Mr. Specter is considering a neglected ice cream store that has been up for sale in Metro Vancouver. Mr. Specter asked for you to review this as a consultant.

Mr. Specter provided you with the following information. A replacement ice cream machine is worth $700,000 with expected life is 5 years. new ice cream machine will rejuvenate the store; however, the store will take time to improve its sales. Sales after first year acquisition is 200,000 ice creams/year with 10% increase year over year. The ice cream at Earnest is at $5/ ice cream. Ice cream price is expected to rise by 3% per year due to inflation. (Mr. Specter is smart so hedoes not pay taxes)

In terms of cost variable cost is expected to be 45% of the price, the cost is expected to increase by inflation as noted above. Mr. Specter will require a new employee to run the store. The salary is minimum wage per hour for 35 hours a week, these are also expected to increase by inflation.

Given that the ice cream store will require marketing, digital marketing company has quoted $10,000/ year expected to increase by inflation. Mr. Specter does not have a return on a similar risk investment and is asking for your advice.

Here is Mr. Specter’s expectation from the consulting contract,

1. Find a discount rate for Mr. Specter based on current interest rates and risk of the project. Explain your findings and rationale for the discount rate.

2. Assess the project/acquisition to calculate NPV, IRR, and Payback Period.

3. Advice Mr. Specter on your analysis.

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