HomeGrown Company is a chain of grocery stores that are similar to indoor farmer
ID: 2492997 • Letter: H
Question
HomeGrown Company is a chain of grocery stores that are similar to indoor farmer's markets, providing fresh, local produce, meats, and dairy products to consumers in urban areas. HomeGrown is considering opening several stores in a new city, and has proposals from three contractors (Alpha, Beta, and Gamma companies) who would like to provide buildings for the new stores.
The amount of expected revenue from the stores will depend on the design of the contractor. For example, if HomeGrown decides on a more open floor plan, with less shelf space for products, revenue would be lower overall. However, if HomeGrown decides on a very crowded floor plan, it may lose customers who appreciate a more open feel.
As the project manager for HomeGrown, you are responsible for deciding which if any of the proposals to accept. HomeGrown's minimum acceptable rate of return is 20%. You receive the following data from the three contractors:
Proposal
Type of Floor Plan
Investment if Selected
Residual Value
Alpha
Very open, like an indoor farmer’s market
$1,472,000
$0.00
Beta
Standard grocery shelving and layout, minimal aisle space
$5,678,900
$0.00
Gamma
Mix of open areas and shelving areas
$2,525,960
$0.00
You have calculated estimates of annual cash flows and average annual income from customers for each of the three contractors' plans. You believe that the annual cash flows will be equal for each of the 10 years for which you are preparing your capital investment analysis. Your conclusions are presented below.
Proposal
Estimated Average
Annual Income
Estimated Average
(after depreciation)
Annual Cash Flow
Alpha
$302,054
$351,145
Beta
$272,019
$475,608
Gamma
$626,564
$704,490
You begin by trying to eliminate any proposals that are not yielding the company’s minimum required rate of return of 20%. Complete the table below, and decide whether Alpha, Beta, and/or Gamma should be eliminated because the average rate of return of their project is less than the company's minimum required rate of return.
Complete the table below. Enter the average rates of return as percentages rounded to two decimal places.
Proposal
Annual Income Average Investment
Average Rate of Return
Accept or Reject?
Estimated Average
Alpha
Accept
Beta
Reject
Gamma
Accept
Proposal
Type of Floor Plan
Investment if Selected
Residual Value
Alpha
Very open, like an indoor farmer’s market
$1,472,000
$0.00
Beta
Standard grocery shelving and layout, minimal aisle space
$5,678,900
$0.00
Gamma
Mix of open areas and shelving areas
$2,525,960
$0.00
Explanation / Answer
Complete table
Proposal Estimated average investment Annual income average Average rate of return Accept or reject Alpha 736000 302054 41.04% Accept Beta 2839450 272019 9.58% Reject Gamma 1262980 626564 49.61% AcceptRelated Questions
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