Waldo County Financial Case

Case Scenario Assumptions:

Waldo County, the well-know real estate developer, worked long hours, and he expected his staff to do the same. So George Probit was not surprised to receive a call from the boss. On this occasion he wanted George to go over the figures for a new $90 million dollar outlet mall to intercept tourists heading downeast toward Maine. The table labeled as “PR 1.1” shows projected revenues and cost in real terms for the tourist mall (figures in $ millions). The malls revenue would come from the retailer’s annual rent, and 5 percent of each store’s gross sales.

Construction of the mall would take three years. The construction cost could be depreciated straight-line over 15 yrs starting at year 3. The land was expected to retain its value, but could not be depreciated for tax purposes.

Construction costs, revenues, operating and maintenance costs, and real estate were all likely to rise in line with inflation, which was forecasted at 2 percent a year. The company’s tax rate was 35 percent and the cost of capital was 9 percent.

PR 1.1

Analysis Findings:

The following is a cost feasibility analysis of the Waldo County outlet mall. The cost of development is expected to be $90 million, and is design to attack tourist heading east towards Maine. The main two main success factors for this project will be Net Present Value (NPV) and Internal Rate of Return (IRR). The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or discount curve and outputs a price; the converse process in DCF analysis - taking a sequence of cash flows and a price as input and inferring as output a discount rate (the discount rate which would yield the given price as NPV.

Internal rates of return are commonly used to evaluate the desirability of investments or projects. The higher a project's internal rate of return, the more desirable it is to undertake the project. Assuming all projects require the same amount of up-front...