Solved: I don t know whether to sell it expand it lease

I don t know whether to sell it expand it lease

"I don't know whether to sell it, expand it, lease it, or what. But I don't think we can keep doing
the same thing for many more years. What I really want to do is to keep it for 5 more years, then
sell it for a bundle," Elmer Kettler said to his wife, Janise, their son, John Kettler, and new
daughter-in-law, Suzanne Gestory, as they were gathered around the dinner table. Elmer was
sharing thoughts on Gulf Coast Wholesale Auto Parts, a company he has owned and operated
for 25 years on the southern outskirts of Houston, Texas. The business has excellent contracts
for parts supply with several national retailers operating in the area-NAPA, AutoZone, O'Reilly,
and Advance. Additionally, Gulf Coast operates a rebuild shop serving these same retailers for
major automobile components, such as carburetors, transmissions, and air conditioning
compressors.
At his home after dinner, John decided to help his father with an important and difficult decision:
What to do with his business? John graduated just last year with an engineering degree from a
major state university in Texas, where he completed a course in engineering economy. Part of
his job at Energcon Industries is to perform basic rate of return and present worth analyses on
energy management proposals.

Over the next few weeks, John outlined five options, including his dad's favorite of selling in 5
years. John summarized all the estimates over a 10-year horizon. The options and estimates
were given to Elmer, and he agreed with them.
Option 1: Remove rebuild. Stop operating the rebuild shop and concentrate on selling wholesale
parts. The removal of the rebuild operations and the switch to an "all-parts house" are expected
to cost $750,000 in the first year. Overall revenues will drop to $1 million the first year with an
expected 4% increase per year thereafter. Expenses are projected at $0.8 million the first year,
increasing 6% per year thereafter.
Option 2: Contract rebuild operations. To get the rebuild shop ready for an operations contractor
to take over will cost $400,000 immediately. If expenses stay the same for 5 years, they will
average $1.4 million per year, but they can be expected to rise to $2 million per year in year 6
and thereafter. Elmer thinks revenues under a contract arrangement can be $1.4 million the first
year and can rise 5% per year for the duration of a 10-year contract.
Option 3: Maintain status quo and sell out after 5 years (Elmer's personal favorite). There is no
cost now, but the current trend of negative net profit will probably continue. Projections are
$1.25 million per year for expenses and $1.15 million per year in revenue. Elmer had an
appraisal last year, and the report indicated Gulf Coast Wholesale Auto Parts is worth a net $2
million. Elmer's wish is to sell out completely after 5 more years at this price, and to make a deal
that the new owner pay $500,000 per year at the end of year 5 (sale time) and the same
amount for the next 3 years.
Option 4: Trade-out. Elmer has a close friend in the antique auto parts business who is making
a "killing," so he says, with e-commerce. Although the possibility is risky, it is enticing to Elmer
to consider a whole new line of parts, but still in the basic business that he already understands.
The trade-out would cost an estimated $1 million for Elmer immediately. The 10-year horizon of

Reach out to freelance2040@yahoo.com for enquiry.

 annual expenses and revenues is considerably higher than for his current business. Expenses
are estimated at $3 million per year and revenues at $3.5 million each year.
Option 5: Lease arrangement. Gulf Coast could be leased to some turnkey company with Elmer
remaining the owner and bearing part of the expenses for building, delivery trucks, insurance,
etc. The first-cut estimates for this option are $1.5 million to get the business ready now, with
annual expenses at $500,000 per year and revenues at $1 million per year for a 10-year
contract.

Help John with the analysis by doing the following:

1. Develop the actual cash flow series and incremental cash flow series (in $1000 units) for all
five options in preparation for an incremental ROR analysis.
2. Discuss the possibility of multiple rate of return values for all the actual and incremental cash
flow series. Find any multiple rates in the range of 0% to 100%.
3. If John's father insists that he make 25% per year or more on the selected option over the
next 10 years, what should he do? Use all the methods of economic analysis you have learned
so far (PW, AW, ROR) so John's father can understand the recommendation in one way or
another.
4. Prepare plots of the PW versus i for each of the five options.
Estimate the breakeven rate of return between options.
5. What is the minimum amount that must be received in each of years 5 through 8 for option 3
(the one Elmer wants) to be best economically? Given this amount, what does the sale price
have to be, assuming the same payment arrangement as presented above?

I don t know whether to sell it expand it lease

ANSWER
https://solvedquest.com/i-don-t-know-whether-to-sell-it-expand-it-lease/

Reach out to freelance2040@yahoo.com for enquiry.

Powered by TCPDF (www.tcpdf.org)