Carl Fredrickson started a sandwich shop immediately upon graduation from colleg
ID: 430081 • Letter: C
Question
Carl Fredrickson started a sandwich shop immediately upon graduation from college. The shop serves wraps with a twist: Carl’s lets customers choose from one of 7 main ingredients (either meat or vegetarian offerings); any of 10 different toppings; one of 5 wrap types; and then the piece de resistance, 30 different types of sauce ranging from sweet to semi- hot to melt-your-tongue-off hot. The total number of sandwich combinations is over 10,000 end sandwiches.
The shop did well from the first day it was open because customers loved Carl’s sauces—many customers came in just for his special pepper chocolate sauce, which was spicy with just a hint of sweetness. The shop was primarily run by Carl and one of his best friends in the first year of operation. Sales for the first year were $150,000; sales for the second year were $280,000. Carl has been planning an expansion for the coming year. Table 10.18 shows the projected sales for this year (year 0) and the following seven years. He has two expansion options. He can lease a new facility in which to locate the shop, a 2,000- square-foot space that could be expanded by 2,000 square feet in steps of 1,000. Alternatively, he can lease a 2,000-square-foot space with no option to expand, but then open another restaurant location in another part of town.
Carl has been quoted a price of $350,000 to open a 2,000-square-foot facility. Each expansion of that facility to add a 1,000-square-foot addition will cost an additional $100,000. The alternative approach, opening a single 2,000-square-foot facility and then opening new facilities as needed, requires an invest- ment of $300,000 for each 2,000-square-foot facility. Carl’s operating costs for labor, utilities, equipment, and other expenses are 40 percent of his sales. The maximum capacity of a single 2,000-square-foot facility is $400,000 per year, so Carl must open a new facility or expand the existing facility when sales hit this number. Any new restaurant or expansion has a lead time of one year from the time Carl approves the idea to the time when the facility is up and running.
Year
Projected Sales
Year 0
280000
Year 1
350000
Year 2
420000
Year 3
490000
Year 4
550000
Year 5
600000
Year 6
645000
Year 7
695000
4. Calculate the projected net present value of your proposed capacity expansion strategy.
Year
Projected Sales
Year 0
280000
Year 1
350000
Year 2
420000
Year 3
490000
Year 4
550000
Year 5
600000
Year 6
645000
Year 7
695000
Explanation / Answer
Assumtion: - Cost of capital is not given so taking 10% to calculate present value factor.
Year Opening Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Option 1 Time for Expansion, 1000sq ft Time for Expansion, 1000sq ft Projected Sales $ 150,000 $ 280,000 $ 350,000 $ 420,000 $ 490,000 $ 550,000 $ 600,000 $ 645,000 $ 695,000 Labour, Equipment and Other Expenses ($60,000) ($112,000) ($140,000) ($168,000) ($196,000) ($220,000) ($240,000) ($258,000) ($278,000) Lease / Opening ($350,000) Expansion ($100,000) ($100,000) Total $ (260,000) $ 168,000 $ 110,000 $ 252,000 $ 294,000 $ 230,000 $ 360,000 $ 387,000 $ 417,000 Present Value Factor 1 0.9091 0.9091 0.9091 0.9091 0.9091 0.9091 0.9091 0.9091 Considering 10% cost of capital $ (260,000) $ 152,727 $ 100,000 $ 229,091 $ 267,273 $ 209,091 $ 327,273 $ 351,818 $ 379,091 Net Present Value $1,756,364 Year Opening Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Option 1 Time for Expansion, 1000sq ft Time for Expansion, 1000sq ft Projected Sales $ 150,000 $ 280,000 $ 350,000 $ 420,000 $ 490,000 $ 550,000 $ 600,000 $ 645,000 $ 695,000 Labour, Equipment and Other Expenses ($60,000) ($112,000) ($140,000) ($168,000) ($196,000) ($220,000) ($240,000) ($258,000) ($278,000) Lease / Opening ($350,000) Expansion ($300,000) Total $ (260,000) $ 168,000 $ (90,000) $ 252,000 $ 294,000 $ 330,000 $ 360,000 $ 387,000 $ 417,000 Present Value Factor 1 0.9091 0.9091 0.9091 0.9091 0.9091 0.9091 0.9091 0.9091 Considering 10% cost of capital $ (260,000) $ 152,727 $ (81,818) $ 229,091 $ 267,273 $ 300,000 $ 327,273 $ 351,818 $ 379,091 Net Present Value $1,665,455