Grey's Point Business Solutions (GPBS) Expansion Decision Report

This report presents a financial analysis for Grey's Point Business Solutions (GPBS), evaluating the decision to either expand its warehouse facility or sell the vacant land adjacent to its current location. Utilizing data provided by GPBS, including revenue forecasts, costs, and tax rates, the report constructs a cash flow analysis to determine the Net Present Value (NPV) and Internal Rate of Return (IRR) for both scenarios over a five-year period. The analysis reveals that expanding the business and constructing a new warehouse yields a higher NPV and IRR compared to selling the land. Furthermore, the report emphasizes the importance of sensitivity analysis to account for potential variations in revenue and other key variables, as well as the consideration of qualitative factors such as technological advancements, competitor actions, and regulatory changes, to make a well-rounded investment decision. The conclusion recommends expansion based on the quantitative analysis, but stresses the need for comprehensive risk assessment and consideration of non-financial factors.

EXECUTIVE SUMMARY
Introduction
Grey’s Point Business Solutions Pty Ltd (GPBS) is a warehouse business located in Sydney.
Currently, the company lies next to a plot of vacant land which remains undeveloped.
The purpose of this report is to determine whether GPBS should expand their business, by
utilizing the vacant land for another warehouse facility, or whether they should sell the land at
its market value. To perform the above analysis, the Net present Value was analyzed and
compared under both scenarios.
Data and Methodology
GPBS provided the following data and forecasts in respect to the company. The data was then
used to perform the NPV analysis under the two options.
 Revenues, wages and maintenance cost for the next 5 years.
 The cost of the new warehouse, depreciation expense and its salvage value in 5 years
 The cost of new equipment, depreciation expense and its salvage value in 5 years
 The cost of old equipment, depreciation expense and its salvage value in 5 years
 The anticipated value of land in 5 years
 Land maintenance cost for the next 5 years if left undeveloped.
 The company tax rate of 30% and required return on similar projects.
The team also provided other data items but these were considered irrelevant for the cash flow
analysis. These data items include the following:-
 Jacob’s oversea and travel cost- This cost is considered a sunk cost, hence it is not relevant
for the cash flow analysis.
 Interest expense- The interest expense is already factored into the company’s required
return. Hence it is not relevant for the cash flow analysis.
 The training Cost of $35,000 is also irrelevant as it has not impact on the project’s future
cash flows.
Based on the relevant data items, assuming a time frame of 5 years, a cash flow analysis was
constructed and the NPV was determined under both options of selling or expanding.
Results
Option 1: Sell the Land
The cash flow analysis from this option shows an NPV of $117,948 and IRR of 66% should GBPS
decide to sell the vacant land to a willing buyer in 5 years.
Option 2: Expand the Business

The cash flow analysis from this option shows an NPV of $363,000 and IRR of 31% should GBPS
decide to expand their business.
It is noted that the NPV under the business expansion option is greater than the NPV under the
option to sell land. Furthermore, the IRR is greater than the company’s required return thus
making this the most viable option.
Conclusion
Based on the above NPV analysis, expanding the business and building a new warehouse facility
would be the better option for GBPS. Thus it is recommended that GPBS should proceed with
Jacob’s suggestion to expand the business using the vacant available land.
However, the company should also consider the following when determining the feasibility of
any project
 Sensitivity Analysis of Cash Flows
In a perfect world, assuming the expected outcome turns out to be the actual, then GBPS
should definitely expand their business.
However, we do not live in a perfect world and the reality may end up being far better or worse
than the expected outcome. For example, in this case, we can observe that if the forecast
revenues given by Jacob are not met, then the NPV will drop thus making the project not
feasible. On the other hand, the vacant plot of land may appreciate in value much faster than
expected in a few years, such that the company may find a buyer willing to pay more than the
anticipated costs of expanding the business.
Consequently, before making any decision, it is important for GBPS to analyze different
scenarios while assessing the outcome of each. One of the ways they can do this is through
sensitivity analysis. This involves applying different weights or probabilities to different scenario
and assessing the overall weighted NPV of the project. This is especially important for the
business expansion option. The company may want to consider a best or worst case scenario
for different revenue streams.
Alternatively, GBPS could also review their required rate of return by including a margin to
cover the additional risk.
 Qualitative decisions
In addition to quantitative measures such as NPV, IRR and/ or Payback period, the company will
also need to take into consideration other qualitative decisions which could have an effect on
the final outcome of a project. Qualitative decisions include the effects of technology,
competitor action, regulatory decisions, tax effects etc.
In the end the decision to accept or reject the project should depend on a combination of the
quantitative and qualitative measures mentioned above.