The owner of Hackers Computer Store is considering what to do with his business over the next five years. Sales growth over the past couple of years has been good, but sales could grow substantially if a major proposed electronics firm is built in his area. Hackers’ owner sees three options. The first is to enlarge his current store, the second is to locate at a new site, and the third is to simply wait and do nothing. The process of expanding or moving would take little time and therefore, the store would not lose revenue. If nothing were done the first year and strong growth occurred then the decision to expand could be reconsidered. Waiting longer than one year would allow competition to move in and would make expansion no longer feasible. The assumptions and conditions are as follows:
(i) Strong growth as a result of the increased population of computer fanatics from the new electronics firm has a 55% probability.
(ii) Strong growth with a new site would give annual return of $195,000 per year. Weak growth with a new site would mean annual returns of $115,000 per year.
(iii) Strong growth with an expansion would give annual returns of $190,000 per year. Weak growth with an expansion would mean annual returns of $100,000.
(iv) At the existing store with no changes, there would be returns of $170,000 per year if there is a strong growth and $105,000 per year if growth is weak.
(v) Expansion at the current site would cost $87,000
(vi) The move to the new site would cost $210,000.
(vii) If growth is strong and the existing site is enlarged during the second year, the cost would still be $87,000.
(viii) Operating costs for all options are equal.
(ix) Use NPV with a rate of return of 16%.