MBA643: Project Risk, Finance & Apple Store Victoria Square 2019

This case study examines Apple's potential investment in a temporary store in Adelaide's Victoria Square, following the rejection of a Melbourne store proposal. It assesses the project's financial viability by analyzing free cash flows, calculating the Net Present Value (NPV), and considering various risk factors. The analysis includes a scenario where the salvage value of the store at the end of its three-year life is uncertain. The study uses both quantitative methods, such as NPV analysis with a 12% discount rate, and qualitative reasoning to determine whether Apple should proceed with the project. The final recommendation is based on the project's potential to generate positive cash flows and create value for shareholders, weighed against the risks associated with uncertain salvage value and potential losses. Desklib offers a wealth of resources, including past papers and solved assignments, to support students in understanding and mastering complex case studies like this one.

Campus (please circle): ONLINE
Postgraduate
Group Case Study: PART B
2019 Trimester 1
INDIVIDUAL
Subject Code: MBA643
Subject Title: Project risk, finance and monitoring
Length of Case Study: Select length of exam
MUST BE UPLOADD BY 11.55PM MONDAY WEEK 9 (NO LATE SUBMISIONS WILL BE ACCEPTED)
Total Number of Questions: Questions 1-4
Total Marks: 12 Marks
Source 1: Victoria Square Apple Store Project Cash Flows
MBA643 Case Study PART B Page 1 of 9
Student ID:

In 2019 Apple is considering whether to build a temporary store in Adelaide Victoria square given
that its Melbourne store was rejected. The initial outlay (today) of building the store is $300 million Assume the store will have a life of 3 years and will generate revenues of $160
million per year over the 3 years (with the first cash flow at the end of year 1). After
that the store will be closed and the land returned to Adelaide Council. The total annual costs of the store will be 10% of the revenues from the store and
will continue for 3 years Depreciation per year will be $15 million per year for three years Assume that Apple can sell the store at the end of 3 years’ time for $100 million
before tax
All values are in AUD. Assume the tax rate is 30% over the 3 years.
Below are the Free Cash Flows (FCFs) for the Victoria Square Apple Store project from Part A.
Consider the below answers and address questions 1-4 below.
Year 0 Year 1 Year 2 Year 3
Revenue $ 160,000,000.00 $ 160,000,000.00 $ 160,000,000.00
Variable Costs -$ 16,000,000.00 -$ 16,000,000.00 -$ 16,000,000.00
Depreciation -$ 15,000,000.00 -$ 15,000,000.00 -$ 15,000,000.00
EBIT (earnings
before interest
$ 129,000,000.00 $ 129,000,000.00 $ 129,000,000.00
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and tax)
Tax -$ 38,700,000.00 -$ 38,700,000.00 -$ 38,700,000.00
Net Income $ 90,300,000.00 $ 90,300,000.00 $ 90,300,000.00
Add Back
Depreciation
$ 105,300,000.00 $ 105,300,000.00 $ 105,300,000.00
Capital
Expenditure
($300,000,000.00)
Sale price $ 70,000,000.00
Free Cash Flow ($300,000,000.00) $105,300,000.00 $105,300,000.00 $175,300,000.00
1. Apart from undertaking NPV analysis, what other risk assessment does Apple need to do
around the Adelaide store to avoid the problems they faced in Victoria (with the Federation
Square store)? Refer to at least one stage in project risk management process in your
answer. (3 marks)
Various risk factors should be considered while evaluating the financial viability of the project in the
form of rise in costs associated with the project and the subsequent revenue associated with the
project. Credit Risk and the market risk are some of the crucial form of investment while
considering the risks for the company (Cornell 2015).
It is important that the management of the company before undertaking the project
evaluate the various risks that could be associated with the project and the associated risks with the
project that can simultaneously hamper the outcome of the project.
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2. What is the Net Present Value (NPV) for the Apple store in Victoria Square Project? Assume a
cost of capital/discount rate of 12%. Show your working out. (Hint: See formula sheet below)
(3 marks)
The net present value for the project shows the financial viability of the project in the form of
various cash flows for the company. While evaluating the net present value for the project it is
important to consider the discount rate for the project, which was around 12%. The discounted
cash flows for the project, which was calculated by taking the free cash flows for the project. The
net present value for the project was around 2.73 million and the Internal rate of return for the
project was around 0.43% (Lima et al., 2017).
3. Should you accept or reject this project? Use one quantitative and one qualitative reason to
support your answer. (2 marks)
The proposed project should be accepted because of the positive cash flows that is generated by
the project in the form of positive net present value. The positive net present value not only shows
the increase in the value of the equity shareholder’s but on the other hand also shows value
creation for the company in the form of higher investment activities. The cash flows from the
project were found to be stable allowing the investment for the project to sustainable (Hayward et
al., 2017).
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4. Assume Apple has received new information from the Adelaide Council. There is now a 40%
chance that Apple can sell the store at the end of the 3 years for the $100 million before tax
and a 60% chance the council may claim the entire sale price (Apple gets nothing). Use
scenario analysis to advise whether Apple should undertake the project in this case. (4
marks)
In the first scenario where there is a 40% chance of getting, the salvage value of around 100 million
at the end of 3rd year will be taken into consideration for the purpose of the analysis and the sale
value of around 100 million would be taken into analysis. The salvage value first would be treated
with the applicable taxation rate and the same would be considered for the purpose of analysis. The
net present value has remained the same under the first case scenario to around 2.73 million. On
the other hand, side under the second scenario the project would not be getting the sale value,
which was taken at 70 million in the base case. The same would significantly affect the after tax cash
flows from the project. As the cash flows from the project dropped significantly the same impacted
the cash flows making the net present value of the project to be negative around -47 million and the
IRR to be around 2.85 years. Under the second case the project would not be accepted by the
company as the same would be making a significant loss for the company thereby reducing the
equity shareholders value (Andor, Mohanty and Toth 2015).
Appendix
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1) NPV Analysis
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References
Andor, G., Mohanty, S.K. and Toth, T., 2015. Capital budgeting practices: A survey of Central and
Eastern European firms. Emerging Markets Review, 23, pp.148-172.
Cornell, B., 2015. Capital Budgeting: A'General Equilibrium'Analysis. Journal of Financial
Perspectives, 3(1).
Hayward, M., Caldwell, A., Steen, J., Gow, D. and Liesch, P., 2017. Entrepreneurs’ capital budgeting
orientations and innovation outputs: Evidence from Australian biotechnology firms. Long Range
Planning, 50(2), pp.121-133.
Lima, A.C., da Silveira, J.A.G., Matos, F.R.N. and Xavier, A.M., 2017. A qualitative analysis of
capital budgeting in cotton ginning plants. Qualitative Research in Accounting & Management,
14(3), pp.210-229.
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