DownEast Tourist Mall Ryan Dresher Ashley Moss Southwestern College-MGMT 565 Instructor-Mohamed Elaoudiy Agenda Background Possible Project-DownEast Tourist Mall Project Evaluation Risk Evaluation Conclusion Background Waldo County Well known real estate developer Known for picking good locations Needs evaluation of new tourist mall project DownEast Tourist Mall Objective: intercept the many tourists heading downeast toward Maine. $90 million investment DownEast Tourist Mall Capital Outlay--$90 million Construction --3 years w/15 year life Income 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 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 NPV and IRR suggest going forward Low risk of negative NPV 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.