978-0078025532 Chapter 12 Lecture Note Part 2

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Option 1 – do nothing to both stores: Added value is $5.60 million. This number is the sum of the NPV

of $3.492 million from Appendix VIII from the base case for the Park Hill Acres store plus the NPV of

Option 2 – expand both stores: Added Value is $4.10 million. This number is the sum of the NPV of

$3.492 million from Appendix VIII plus the negative NPV of ($0.504) million from Appendix IX.

Option 3 – expand the Park Hill Acres store only: Added Value of $5.10 million. This value is generated

by taking the base case for Park Hill Acres store from Appendix VIII of $3.492 million and subtracting

Option 4 – expand the Webster Street store only: Added Value is $4.60 million. Following the same logic

Option 5 – build a superstore at the Park Hill Acres location: The value of this decision depends on the

degree of sales erosion that CLM suffers at its neighboring stores. If there is no erosion, the superstore

0.485 + 2.112).

Option 6 – Build a superstore at the Park Hill Acres and expand the Webster Street store: Here again the

Option 7–build a superstore at the Park Hill Acres location and close the Webster Street store: This

decision generates a value of $2.06 million. (See Appendices I, II, and XII and the cost of closure

This financial analysis indicates that the best financial option for CLM is a function of a) the amount of

sales erosion; b) Albertson’s decision regarding a superstore in the Park Hill area; and c) the level of sales

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then Option 1 – do nothing at both stores is the best option.

If CLM builds a superstore at the Park Hill Acres and Albertson’s also builds a superstore, then the best

option depends on the sales level that the Park Hill Acres superstore can achieve. A sales level of $37

million, as illustrated in Appendix XIII, provides an NPV of $3.19 million. This value is generated by

taking the base case for Park Hill Acres from Appendix VIII, subtracting the superstore with $37 million

in sales, Appendix XIII, and adding the base case for the Webster Street store from Appendix X ($3.492 –

2.108 + 2.112).

A NPV value of $3.19 million is, as illustrated in Question 2, the same NPV as if CLM did nothing and

Albertson’s built a superstore. Hence, as long as CLM can maintain its sales at the Webster Street store

and increase its sales from its Park Hill Acres superstore to more than $37 million, CLM is better off

investing in the superstore at the Park Hill Acres location.

4. Recommend which option CLM should select for the Park Hill Acres area.

Answer: The superstore option for Park Hill Acres appears to be the better of the two alternatives for

several reasons. First, the NPV is greater for this option as compared to the ‘expansion only’ option.

customers as ‘forward–looking’ as a market leader if it invests prior to Albertsons.

5. Recommend policies that CLM should adopt in evaluating other store remodel/expansion

investment situations.

Answer: There are several important policy guidelines that students should identify for the evaluation

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• All possible investment options for store remodel and expansion decisions should be considered.

options rather than IRR.

Note to Instructors: Embedded below is an Excel spreadsheet that can be used to generate the solution

tables to follow.

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Table 1 Assumptions for Spreadsheets

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