Running head: WALDO COUNTY
Waldo County
Travis Allender, James Boyd, Ebony Branch and Jeffry Clark
Financial Analysis and Management I/ Southwestern College
Dr. Darrin DeReus
December 9th, 2012
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WALDO COUNTY
Waldo County
Waldo County is a real estate developer known for his good instinct when making real
estate decisions. He is the type of guy that works long hours and expects the same work ethic
from his employees. Waldo understands real estate but does not always make the best financial
decisions. Relying on instinct has been successful in the past but a new $90 million outlet mall
is a lot to take a gamble on. Waldo needs financial assistance to determine whether a new outlet
mall is a project worth developing.
Statement of Problem
Before walking out the door for the weekend, George Chavez received a call from Waldo
County about a new potential project. Waldo is contemplating building a new $90 million outlet
mall designed to intercept tourists heading down east toward Maine. George must go over the
provided figures to assess risk for the new project and give his findings to Waldo County by
Monday morning. George wants to provide financial numbers but provide the bottom line for
the new project. Will the outlet mall make money or lose money? This is the question that must
be answered.
New Options
With a potential new outlet mall project, George had multiple tasks that were in need of
being completed within the next three days. George’s first task was to draw a summary of the
projected revenues and costs. He wanted to know if the project made financial sense. His
second task was to look at some of the things that might go wrong. Inflation and shortage of
sales were concerns for the project. George knew that construction costs, revenues, operating and
maintenance costs, and real estate taxes were all likely to rise with inflation. His third task was to
look at possible construction cost overruns and delays due to required zoning changes and
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WALDO COUNTY
environmental approvals. Due to a previous experience, George saw construction costs overruns
increase 25% and delays on construction up to a year.
The final task is to calculate net present
value and conduct a sensitivity and scenario analysis for the project.
Financial Information & Analysis
YEAR
0
Investment:
Land
Construction
Operations:
Rentals
Share of
Retail Sales
Operating
and
maintenance
costs
Real Estate
Taxes
1
2
30
10
3
4
5-17
12
24
12
24
12
24
30
20
2
4
4
10
10
10
2
2
3
4
4
4
George conducted a scenario and sensitivity analysis to assess risk. According to
Mietzner, ‘Scenarios, as a prime technique of future studies, have long been used by government
planners, corporate managers and military analysts as powerful tools to aid in decision making in
the face of uncertainty. The idea behind them is to establish thinking about possible futures
which can minimize surprises and broaden the span of managers’ thinking about different
possibilities’ (Mietzner & Reger, 2005). The analysis showed positive financials even with a
pessimistic and optimistic outcome. The net present value (NPV) for new outlet mall is 50.24
million. This number was factored with a company tax rate of 35%, two percent inflation rate
and the cost of capital at 95 in nominal terms. Construction time could cause multiple changes
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WALDO COUNTY
to net present value. Delays would increase the timeline by one year and push profitability back
while adding $2-4 million in operating costs and $2-3 million in taxes. Finishing early could cut
construction costs and add rental and retail income.
Recommendations and Conclusion
The outlet mall project is a financially stable project for Waldo County and associates.
After all the financials and scenario analysis are completed, this project holds very little risk.
The only variable that made NPV negative was a 10% inflation rate and that is not a likely
scenario. While the worst case scenario for retail sales made a big impact, it still allowed
positive net present value. The other variable all made changes to net present value, but none
were significant enough to warrant concern on the part of the investors. Overall, the outlet mall
will be a financial stable investment and will make money. That’s the bottom line.
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References
Brealey, R. A., Myers, S. C., & Allen, F. (2011). Principles of corporate finance.
(10 ed.). New York, NY: McGraw-Hill.
Mietzner, D. & Reger, G. (2005). ‘Advantages and disadvantages of scenario approaches for
strategic foresight’, Int J. Technology Intelligence and Planning, Vol 1, No. 2, pp.220239.
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