Submitted by: Submitted by pandapizon
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Words: 1388
Pages: 6
Category: Business and Industry
Date Submitted: 03/21/2015 04:43 AM
Waldo County
Bryant Devine, Cody Groves, and Sarah Ellis
MGMT565/Southwestern College
Dr. Darrin DeReus
December 16, 2012
Waldo County
A well-known real estate developer, Waldo County, is interested in a new $90 million property. Mr. Waldo believes this location is perfect to build an outlet mall and expects it to intercept and attract plenty of tourists that are headed down east. The revenue from the outlet mall would come from two different sources: the annual rent charged to retailers and 5% of each store’s gross sales. Mr. County has asked his financial manager, George Sanchez, to review the plans for the outlet mall and summarize the projects potential revenues and costs.
Statement of the Problem
Mr. County has asked the finance manager, Mr. Sanchez to draw up figures to check if this investment made financial sense. The finance department must first summarize the projected revenues and costs in order to determine what the net present value (NPV) will be. However, calculating the NPV is not enough in this case because this project is subject to several different scenarios that can easily change whether this project is profitable or not.
Mr. Sanchez has identified a few different things that could potentially go wrong with project. What if store sales fell well below forecast? How far would the sales need to fall before the project was in the red? What if inflation rates rose? What about construction overruns or delays? Now that all of the unk-unks have been identified, a sensitivity and scenario analysis and will need to be conducted. A sensitivity analysis is where marketing and production staffs are asked to give optimistic and pessimistic estimates for the underlying variables. A scenario analysis will allow management to look at different but consistent combination of variables (Brealey, Myers, & Allen, 2011). Mr. Sanchex has decided that inflation rate and construction overruns or delays are the largest...