Source 1: Victoria Square Apple Store Project Cash Flows
In 2019 Apple is considering whether to build a temporary store in Adelaide Victoria square given that its Melbourne store was rejected.
The initial outlay (today) of building the store is $300 million
Assume the store will have a life of 3 years and will generate revenues of $160 million per year over the 3 years (with the first cash flow at the end of year 1). After that the store will be closed and the land returned to Adelaide Council.
The total annual costs of the store will be 10% of the revenues from the store and will continue for 3 years
Depreciation per year will be $15 million per year for three years
Assume that Apple can sell the store at the end of 3 years' time for $100 million before tax
All values are in AUD Assume the tax rate is 30% over the 3 years.
1. Apart from undertaking NPV analysis, what other risk assessment does Apple need to do around the Adelaide store to avoid the problems they faced in Victoria (with the Federation Square store)? Refer to at least one stage in project risk management process in your answer. (3 marks)
2. What is the Net Present Value (NPV) for the Apple store in Victoria Square Project? Assume a cost of capital/discount rate of 12%. Show your working out. (Hint: See formula sheet below) (3 marks)
3. Should you accept or reject this project? Use one quantitative and one qualitative reason to support your answer. (2 marks)
4. Assume Apple has received new information from the Adelaide Council. There is now a 40% chance that Apple can sell the store at the end of the 3 years for the $100 million before tax and a 60% chance the council may claim the entire sale price (Apple gets nothing). Use scenario analysis to advise whether Apple should undertake the project in this case. (4 marks)