Question

Walmart is considering opening a small experimental store in New York City. A store is expected to have a long economic life, but the valuation horizon is 19 years. The store in New York is likely to generate revenues of $30M in the first year and then it grows at 5.0%. But the costs of running the business are high because the margins on all the products sold are low. (It is a volume business!) The cost of goods sold is $12M in year 1 and it is expected to grow at 3.0% per year thereafter. Selling and administration costs are likely to be $1.0M every year as it is a small store. The tax rate is 35%. Walmart is so good at managing its stores that working capital increases can be assumed to be negligible. But since New York City is an expensive place, Walmart will have to invest $200M in purchasing a building (with land) even though it is a much smaller property than a usual Walmart store. The good news is that this outlay can be straight line depreciated over 19 years. Also, Walmart has estimated that the after-tax terminal value in year 19 dollars is $100M. This value is the present value of all cash flows in year 20 and beyond. What is the NPV of opening this new store if the appropriate discount rate is 5.5%? (Again, all cash flows except initial investments happen at the end of the year. You are strongly encouraged to use a spreadsheet.) (Enter just the number in dollars without the $ sign or a comma and round off decimals to the closest integer, i.e., rounding $30.49 down to $30 and rounding $30.50 up to $31.)

Answer 1

Calculation given in second column

Heads	Formula	Year
Years		1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19
Revenue	X*1.05	30	32	33	35	36	38	40	42	44	47	49	51	54	57	59	62	65	69	72
COGS	X*1.03	12	12	13	13	14	14	14	15	15	16	16	17	17	18	18	19	19	20	20
Selling	X	1	1	1	1	1	1	1	1	1	1	1	1	1	1	1	1	1	1	1
Net Revenue	Revenue - Cogs - Selling	17	18	19	21	22	23	25	26	28	30	32	34	36	38	40	43	45	48	51
Post Tax	Net Revenue * (1-.35)	11	12	13	13	14	15	16	17	18	19	21	22	23	25	26	28	29	31	33
Depreciation benefit	(200/19)*.35	4	4	4	4	4	4	4	4	4	4	4	4	4	4	4	4	4	4	4
Total	Post Tax + Depreciation benefit	15	15	16	17	18	19	20	21	22	23	24	26	27	28	30	31	33	35	37
Termination value		0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	100
Discounting factor	1/(1.055^N)	1	1	1	1	1	1	1	1	1	1	1	1	0	0	0	0	0	0	0
Discounted value	(Total+Termination)*Discounting factor	14	14	14	14	14	14	14	14	14	14	13	13	13	13	13	13	13	13	50
Adding all columns of discounted value	294