Essay About Analysis Of Design Options And Design Options

Tr Management Consultants
Essay Preview: Tr Management Consultants
Report this essay
TR Management ConsultantsMemoTo:Karen McKibbin, President, Nordstorm CanadaFrom:Steve McCann, Partner, TR Management ConsultantsDate:March 15, 2013Re:Analysis of Design Options for Sherway Gardens Store This memo contains an analysis conducted by my project team on the two proposed design options for the upcoming Sherway Gardens store opening based on discounted cash flows and estimated net present value valuation of each design option. Design option of having a two floor store with the restaurant will be labeled as “Design A” and design options of having a two floor store with a restaurant will be labeled as “Design B”, throughout the contents of this report. Assumptions used calculations presented below include using a discount rate of 8.43% (appropriate to reflect Nordstrom’s weighted average cost of capital throughout the years) and annual cash flows for a period of 5 years (as policy of capital budgeting at Nordstorm).Revenue ProjectionsBased on the expected sales level assumptions discussed in our previous meeting and the level of revenue increases projections with the Nordstorm Design Team, Design B will result in higher level of revenue. For example, in year 1, Design B’s total revenue is $450,000 more than Design A’s (Attachment A). The difference of revenue generated is attributed to the higher level of sales per square foot by the restaurant revenue stream in Design B. Additionally, from the discussion with the Nordstorm Design Team, Design B will experience an annual increase percentage of sales of 5.5% which is greater of Design A’s level of 5%. As you have noted earlier that the level of sales per square foot for the restaurant is ambiguous so my team has performed a sensitivity analysis on varying amounts for this factor. Our findings indicated that if the sales per square foot for the restaurant were the same as the retail store (of $400 per square foot), the two designs will have the same revenue of $ 55,200,000.00 in the first year (Attachment A) but vary in the succeeding years as Design B’s sales are expected to increase by 5.50% instead of 5% for Design A. Another sensitivity analysis performed was changing the sales per square foot for the restaurant to $300 per square foot. Under this assumption, Design A will be yielding a higher level of revenue for the first two years as in year 1, revenue generate will be $ 55,200,000.00 (Design A) and $ 54,900,000.00 (Design B) and in year 2, revenue generated will be $ 57,960,000.00 (Design A) and $ 57,919,500.000 (Design B). However from year 3 to year 5, Design B’s increase in revenue will outpace that of Design A’s. Overall, Design B will produce a higher level of revenue under all three different assumptions for sales per square foot for the restaurant for Design B calculated by my team members. ProfitabilityConsistently throughout the various sensitively analysis for Design B assumption, Design A would still result in the higher level contribution margin through year 1 to year 5 such as 37.50% for Design A compare to 36.61% for Design B under the original $550 sales per square foot for restaurant in Design B. Design A produces a more favourable contribution margin as it has a lower level of variable expenses compared to Design B such as $34500000 (Design A) compared to $34800000 (Design B) in year 1. In Design A, the lower level of variable expenses contributes to a higher numerator when calculating the contribution margin. In contrast, Design B produces a higher operating margin with an exception in year 1 where Design A’s operating margins higher as it is 6.85% compared to Design B’s operating margin of 6.75%. With the other two sensitivity analysis performed on sales per square foot for the restaurant in Design B where sales per square foot was less than original $500, Design A produced higher level of operating margin throughout the year. A further analysis in the sales per square foot for the restaurant would be a deciding factor in whether Design A or Design B will produce a higher operating margin throughout the years. Design A produces higher profit margins and potentially higher overall net income especially if sales per square foot for restaurant in Design B is indeed less than the estimated $500.