DownEast Tourist Mall
Ryan Dresher
Ashley Moss
Southwestern College-MGMT 565
Instructor-Mohamed Elaoudiy
Agenda
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Background
Possible Project-DownEast Tourist Mall
Project Evaluation
Risk Evaluation
Conclusion
Background
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Waldo County
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Well known real estate developer
Known for picking good locations
Needs evaluation of new tourist mall project
DownEast Tourist Mall
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Objective: intercept the many tourists heading
downeast toward Maine.
$90 million investment
DownEast Tourist Mall
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Capital Outlay--$90 million
Construction --3 years w/15 year life
Income
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Annual rent from retailers--$12m
5% of each tenants gross sales--$24m
Cost of Capital –9%
Project Evaluation
Projected Revenues (millions)
Year
0
1
2
Investment
Land
Construction
Operations:
Rentals
Share of retail sales
Revenue
Operating and maintenance costs
Real Estate taxes
Depriciation
Net Income
NPV
-30
-20
-30
4
5-17
12
24
36
-10
-4
-6
22
12
24
36
-10
-4
-6
22
12
24
36
-10
-4
-6
22
$20.18
$20.18
-10
-50
-2
-2
-30
-4
-2
-10
-4
-3
-54
-36
-17
($49.54)
3
($33.03) ($15.60) $20.18
(Brealey, Myers & Allen, 2011)
5
Project Evaluation
Initial Investment
Cost of Capital
Total NPV
Total IRR
Payback
Breakeven (Net Income)
90M
9%
$43.97
15%
6.5 years
15
(30% less sales)
Risks
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Retail Sales Slump
Rental Sales Slump
High Construction Costs
Delayed Construction
Inflation
Sensitivity Analysis
Sensitivity Analysis
Variable
Retail Sales
Rentals
High Construction Cost
Delay in Construction
Inflation
Range
Pessimistic Expected Optimistic
18
24
30
9
12
15
112.5
90
81
1 year
0
1 year
10%
2%
0%
Pessimistic
6.62
25.29
23.55
30.47
37.74
NPV
Expected Optimistic
43.97
81.31
43.97
62.64
43.97
52
43.97
66.44
43.97
45.21
Risk Scenario Analysis
Variable
Retail Sales
Rentals
High Construction Cost
Delay in Construction
Inflation
Variable
Retail Sales
Rentals
High Construction Cost
Delay in Construction
Inflation
Variable
Retail Sales
Rentals
High Construction Cost
Delay in Construction
Inflation
Range
Pessimistic Expected
18
24
9
12
112.5
90
1 year
0
10%
2%
Range
Pessimistic Expected
18
24
9
12
112.5
90
1 year
0
10%
2%
Range
Pessimistic Expected
18
24
9
12
112.5
90
1 year
0
10%
2%
React
24.5
12.5
NPV
Result
43.97
43.97
37.74
React
28
14.2
React
NPV
Result
44.03
44.03
9.83
9.83
NPV (Expected 43.97)
Result
-36.83
Risk Contingency and Response
Risk Response Matrix
Risk Event
Retail Sales slump (up to
25%)
Rental Sales slump, high
vacancy (up to 25%)
Contingency Plan
Trigger
Utilize solid anchor
tenents up front to drive
heavy traffic
1st year slow sales
Benchmark other tourist
malls for healthy tenent
trends
1st year slow rents
Response
Evaluate tenents,
subsidize marketing or
other incentives
Increase marketing,
provide incentives
Evaluate project
managers, contractors
for improvement,
Increase retail and rental
sales to compensate
Delay in construction (up
to 12 mos)
Look for City, County,
Federal subsidies,
Utilize contractors with
good history
Grease the process by
familiarizing regulatory
agencies about the
project early
Inflation (+10%)
Hedge by staying ahead
of schedule and under
budget; buy market
securities that increase
Increase retail sales and
in value when interest Regulatory and economic rent requirements to
rate increases.
clues to higher interests compensate
High Contsruction Costs
(up to 25%)
High project cost ratio
early
Regulatory tasks
Increase communication
exceeding structured time with regulatory agencies
Conclusion
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NPV and IRR suggest going forward
Low risk of negative NPV
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Income would have to dip 30% in all years to
cause negative NPV
6.5 year payback
Recommendation to move forward
References
Brealey, R. A., Myers, S. C., & Allen, F. (2011). Principles of corporate
finance. (10 ed.). New York, NY: McGraw-Hill.