DownEast Tourist MallRyan 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%

(Brealey, Myers & Allen, 2011) 5

Project Evaluation

Year0 1 2 3 4 5-17

Land -30Construction -20 -30 -10

Rentals 12 12 12Share of retail sales 24 24 24Revenue -50 -30 -10 36 36 36Operating and maintenance costs -2 -4 -4 -10 -10 -10Real Estate taxes -2 -2 -3 -4 -4 -4Depriciation -6 -6 -6Net Income -54 -36 -17 22 22 22

NPV ($49.54) ($33.03) ($15.60) $20.18 $20.18 $20.18

Investment

Operations:

Projected Revenues (millions)

Project Evaluation

Initial Investment 90MCost of Capital 9%Total NPV $43.97Total IRR 15%Payback 6.5 yearsBreakeven (Net Income) 15 (30% less sales)

Risks Retail Sales Slump Rental Sales Slump High Construction Costs Delayed Construction Inflation

Sensitivity Analysis

VariablePessimistic Expected Optimistic Pessimistic Expected Optimistic

Retail Sales 18 24 30 6.62 43.97 81.31Rentals 9 12 15 25.29 43.97 62.64High Construction Cost 112.5 90 81 23.55 43.97 52Delay in Construction 1 year 0 1 year 30.47 43.97 66.44Inflation 10% 2% 0% 37.74 43.97 45.21

Sensitivity AnalysisRange NPV

Risk Scenario Analysis

VariablePessimistic Expected React Result

Retail Sales 18 24Rentals 9 12High Construction Cost 112.5 90 -36.83Delay in Construction 1 year 0Inflation 10% 2%

Range NPV (Expected 43.97)

VariablePessimistic Expected React Result

Retail Sales 18 24 24.5 43.97Rentals 9 12 12.5 43.97High Construction Cost 112.5 90Delay in Construction 1 year 0Inflation 10% 2% 37.74

Range NPV

VariablePessimistic Expected React Result

Retail Sales 18 24 28 44.03Rentals 9 12 14.2 44.03High Construction Cost 112.5 90 9.83Delay in Construction 1 year 0 9.83Inflation 10% 2%

Range NPV

Risk Contingency and ResponseRisk Event Contingency Plan Trigger Response

Retail Sales slump (up to 25%)

Utilize solid anchor tenents up front to drive heavy traffic 1st year slow sales

Evaluate tenents, subsidize marketing or other incentives

Rental Sales slump, high vacancy (up to 25%)

Benchmark other tourist malls for healthy tenent trends 1st year slow rents

Increase marketing, provide incentives

High Contsruction Costs (up to 25%)

Look for City, County, Federal subsidies, Utilize contractors with good history

High project cost ratio early

Evaluate project managers, contractors for improvement, Increase retail and rental sales to compensate

Delay in construction (up to 12 mos)

Grease the process by familiarizing regulatory agencies about the project early

Regulatory tasks exceeding structured time

Increase communication with regulatory agencies

Inflation (+10%)

Hedge by staying ahead of schedule and under budget; buy market securities that increase in value when interest rate increases.

Regulatory and economic clues to higher interests

Increase retail sales and rent requirements to compensate

Risk Response Matrix

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.