Part 2. New Stores Your next assignment is to determine if AAP should invest in a new stores so you need to determine net cash flows and NPV and determine if the project is viable or not. Capital expenditures to produce the new stores will initially require an investment of $1.8 billion. Other development costs that will be required to finish the stores project is $900 million this year. Any ongoing costs for upgrades will be covered in the margin calculation below. The store project is expected to have a life of five years. First-year revenues for the new ride are expected to be $3,400,000,000 ($3,400 million). The ride revenues are expected to grow by 37% for the second year, and then increase by 5% for the third, decrease by 15% for the 4th and finally decrease by 25% for the 5th (final) year of operation. Your job is to determine the rest of the cash flows associated with this project. Your boss has indicated that the operating costs and net working capital requirements are similar to the rest of the company's products. Since your boss hasn't been much help, here are some tips to guide your analysis: 1. You will need to use the Financial Statements that you downloaded in Part 1. 2. You are now ready to determine the free cash flow. Compute the free cash flow based on the information above for each year using: Free Cash Flow = (Revenues - Costs - Depreciation) x(1- Tax Rate) + Depreciation - Capex - Change in NWC Set up the timeline and computation of the free cash flow in separate, contiguous columns for each year of the project life. Be sure to make outflows negative and inflows positive. Assume that the project's profitability will be similar to AAP's existing projects and estimate costs for each year of your project by using the average ratio of non-depreciation costs to revenue for the last 2 fiscal years (in practice you really tend to use at least 4 years worth of data, but for this exercise 2 years will suffice): (Costs of Goods Sold* + SG&A)/Sales *AAP calls cost of goods sold, cost of sales You should assume that this ratio will hold for this project as well. You do not need to break out the individual components of operating costs in your forecast Simply the forecast to the Total Cost of Goods Sold (or cost of revenue) + SG&A +R&D for each year. Determine AAP's tax rate as 1- (Income After Tax/Income Before Tax) in the last fiscal year reported. Recalculate the WACC form Part 1 using this tax rate. What should you use if this number is negative? Calculate the net working capital required each year by assuming that the level of NWC will be a constant percentage of the project's sales. Use AAP's last 2 fiscal year average NWC/Sales to estimate the required percentage. (Use only accounts receivable, accounts payable, and inventory to measure working capital. Other components of current assets and liabilities are harder to interpret and are not necessarily reflective of the project's required NWCe.g., AAP's cash holdings.) To determine the free cash flow, calculate the additional capital investment and the change in net working capital each year. Determine the NPV of the project with WACC calculated in Part 1 step 10 and the projects IRR . For the NPV calculation remember to add the first CF when you are using the excel function =NPV(rate, CF1:CF5) + CFO For the IRR include all cash flows in your excel calculation. Should AAP invest in the project? Dec. 28, 2019 Dec. 29, 2018 $ 418,665 689,469 4,432,168 155,241 5,695,543 1,433,213 2,365,325 992,240 709,756 52,448 11,248,525 $ 896,527 624,972 4,362,547 198,408 6,082,454 1,368,985 990,237 550,593 48,379 9,040,648 CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands 2 Current assets: 3 Cash and cash equivalents 4 Receivables, net 5 Inventories 6 Other current assets 7 Total current assets 8 Property and equipment, net of accumulated depreciation of $2,037,849 and $1,918,502 9 Operating lease right-of-use assets 10 Goodwill 11 Intangible assets, net 12 Other assets 13 Assets, Total 14 Current liabilities: 15 Accounts payable 16 Accrued expenses 17 Other current liabilities 18 Total current liabilities 19 Long-term debt 20 Noncurrent operating lease liabilities 21 Deferred income taxes 22 Other long-term liabilities 23 Commitments and Contingencies 24 Stockholders' equity: Preferred stock, nonvoting. 50.0001 par value, 10,000 shares authorized; no shares issued or 25 outstanding Common stock, voting, 50.0001 par value, 200,000 shares authorized; 76,051 shares issued and 69,232 outstanding at December 28, 2019 and 75,831 shares issued and 72,460 outstanding at 26 December 3, 2018 4 ... CONSOLIDATED BALANCE SHEETS CONSOLIDATED BALANCE SHEETS (Pa Ready 3,421,987 535,863 519,852 4,477,702 747,320 2,017,159 334,013 123,250 3,172,790 623,141 90,019 3,885,950 1,045,720 318,353 239,812 CONSOLIDATED STATEMENTS OF OP 26 December 39, 2018 27 Additional paid in capital 28 Treasury stock, at cost, 6,819 and 3,371 shares 29 Accumulated other comprehensive loss 30 Retained earnings 31 Total stockholders' equity 32 Liabilities and Stockholders' Equity, Total 735,183 (924,389) (34,569) 3,772,818 3,549,081 $ 11,248,525 694,797 (425,954) (44,193) 3,326,155 3,550,813 $9,040,648 Dec. 28, 2019 $ 2,112,614 Oct. 05, 2019 $2,312,106 3 Months Jul. 13, 2019 $2,332,246 928,769 1,011,926 1,009,438 CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) shares in Thousands, Sin Thousands 3 Net sales 4 Cost of sales, including purchasing and warehousing costs 5 Gross profit 6 Selling general and administrative expenses 7 Operating income 8 Other, net: 9 Interest expense 10 Other income, net 11 Total other, net 12 Income before provision for income taxes 13 Provision for income taxes 14 Net income 15 Basic earnings per common share 16 Weighted average common shares outstanding 17 Diluted earnings per common share 18 Weighted average common shares outstanding + het $ 95,907 $ 1.39 $ 123,669 $ 1.76 $ 124,820 $ 1.74 $ 1.38 $1.75 $ 1.73 19 20 X ft CONSOLIDATED STATEMENTS OF OPERATIONS- USD ($) shares in Thousands, Sin Thousands 3 Months Ended Jul. 13, 2019 Dec. 29, 2018 $ 2,332,246 $2,105,072 Oct. 06, 2018 $2,274,982 Jul. 14, 2018 $2,326,652 4 Months Ended Apr. 20, 2019 Apr. 21, 2018 $2,952,036 $2,873,848 12 Months Ended Dec. 28, 2019 Dec. 29, 2018 $ 9,709,003 $9,580,554 5,454,257 5,361,141 4,254,746 4,219,413 3,577,566 3,615,138 677,180 604,275 Dec. 30, 2017 $9,373,784 5.288.735 4,085,049 3,514,837 570,212 1,009,438 928,643 1,006,927 1,011,559 1 ,304,612 1,272,284 (39,898) 464 (39,434) 637,746 150,850 $ 486,896 $6.87 70,869 $6.84 71,165 (56,588) 7,577 (49,011) 555,264 131,417 $ 423,847 $5.75 73,728 $ 5.73 73,991 (58,801) 8,848 (49,953) 520,259 44,754 $ 475,505 $6.44 73,846 $ 6.42 74,110 $ 121,820 $ 1.74 $53,441 $0.74 $ 115,843 $1.57 $ 117,836 $ 1.59 OFFRES $ 142,500 $ 1.99 $ 136,727 $1.85 $1.73 $ 0.74 $1.56 $ 1.59 $ 1.98 $ 1.84 Part 2. New Stores Your next assignment is to determine if AAP should invest in a new stores so you need to determine net cash flows and NPV and determine if the project is viable or not. Capital expenditures to produce the new stores will initially require an investment of $1.8 billion. Other development costs that will be required to finish the stores project is $900 million this year. Any ongoing costs for upgrades will be covered in the margin calculation below. The store project is expected to have a life of five years. First-year revenues for the new ride are expected to be $3,400,000,000 ($3,400 million). The ride revenues are expected to grow by 37% for the second year, and then increase by 5% for the third, decrease by 15% for the 4th and finally decrease by 25% for the 5th (final) year of operation. Your job is to determine the rest of the cash flows associated with this project. Your boss has indicated that the operating costs and net working capital requirements are similar to the rest of the company's products. Since your boss hasn't been much help, here are some tips to guide your analysis: 1. You will need to use the Financial Statements that you downloaded in Part 1. 2. You are now ready to determine the free cash flow. Compute the free cash flow based on the information above for each year using: Free Cash Flow = (Revenues - Costs - Depreciation) x(1- Tax Rate) + Depreciation - Capex - Change in NWC Set up the timeline and computation of the free cash flow in separate, contiguous columns for each year of the project life. Be sure to make outflows negative and inflows positive. Assume that the project's profitability will be similar to AAP's existing projects and estimate costs for each year of your project by using the average ratio of non-depreciation costs to revenue for the last 2 fiscal years (in practice you really tend to use at least 4 years worth of data, but for this exercise 2 years will suffice): (Costs of Goods Sold* + SG&A)/Sales *AAP calls cost of goods sold, cost of sales You should assume that this ratio will hold for this project as well. You do not need to break out the individual components of operating costs in your forecast Simply the forecast to the Total Cost of Goods Sold (or cost of revenue) + SG&A +R&D for each year. Determine AAP's tax rate as 1- (Income After Tax/Income Before Tax) in the last fiscal year reported. Recalculate the WACC form Part 1 using this tax rate. What should you use if this number is negative? Calculate the net working capital required each year by assuming that the level of NWC will be a constant percentage of the project's sales. Use AAP's last 2 fiscal year average NWC/Sales to estimate the required percentage. (Use only accounts receivable, accounts payable, and inventory to measure working capital. Other components of current assets and liabilities are harder to interpret and are not necessarily reflective of the project's required NWCe.g., AAP's cash holdings.) To determine the free cash flow, calculate the additional capital investment and the change in net working capital each year. Determine the NPV of the project with WACC calculated in Part 1 step 10 and the projects IRR . For the NPV calculation remember to add the first CF when you are using the excel function =NPV(rate, CF1:CF5) + CFO For the IRR include all cash flows in your excel calculation. Should AAP invest in the project? Dec. 28, 2019 Dec. 29, 2018 $ 418,665 689,469 4,432,168 155,241 5,695,543 1,433,213 2,365,325 992,240 709,756 52,448 11,248,525 $ 896,527 624,972 4,362,547 198,408 6,082,454 1,368,985 990,237 550,593 48,379 9,040,648 CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands 2 Current assets: 3 Cash and cash equivalents 4 Receivables, net 5 Inventories 6 Other current assets 7 Total current assets 8 Property and equipment, net of accumulated depreciation of $2,037,849 and $1,918,502 9 Operating lease right-of-use assets 10 Goodwill 11 Intangible assets, net 12 Other assets 13 Assets, Total 14 Current liabilities: 15 Accounts payable 16 Accrued expenses 17 Other current liabilities 18 Total current liabilities 19 Long-term debt 20 Noncurrent operating lease liabilities 21 Deferred income taxes 22 Other long-term liabilities 23 Commitments and Contingencies 24 Stockholders' equity: Preferred stock, nonvoting. 50.0001 par value, 10,000 shares authorized; no shares issued or 25 outstanding Common stock, voting, 50.0001 par value, 200,000 shares authorized; 76,051 shares issued and 69,232 outstanding at December 28, 2019 and 75,831 shares issued and 72,460 outstanding at 26 December 3, 2018 4 ... CONSOLIDATED BALANCE SHEETS CONSOLIDATED BALANCE SHEETS (Pa Ready 3,421,987 535,863 519,852 4,477,702 747,320 2,017,159 334,013 123,250 3,172,790 623,141 90,019 3,885,950 1,045,720 318,353 239,812 CONSOLIDATED STATEMENTS OF OP 26 December 39, 2018 27 Additional paid in capital 28 Treasury stock, at cost, 6,819 and 3,371 shares 29 Accumulated other comprehensive loss 30 Retained earnings 31 Total stockholders' equity 32 Liabilities and Stockholders' Equity, Total 735,183 (924,389) (34,569) 3,772,818 3,549,081 $ 11,248,525 694,797 (425,954) (44,193) 3,326,155 3,550,813 $9,040,648 Dec. 28, 2019 $ 2,112,614 Oct. 05, 2019 $2,312,106 3 Months Jul. 13, 2019 $2,332,246 928,769 1,011,926 1,009,438 CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) shares in Thousands, Sin Thousands 3 Net sales 4 Cost of sales, including purchasing and warehousing costs 5 Gross profit 6 Selling general and administrative expenses 7 Operating income 8 Other, net: 9 Interest expense 10 Other income, net 11 Total other, net 12 Income before provision for income taxes 13 Provision for income taxes 14 Net income 15 Basic earnings per common share 16 Weighted average common shares outstanding 17 Diluted earnings per common share 18 Weighted average common shares outstanding + het $ 95,907 $ 1.39 $ 123,669 $ 1.76 $ 124,820 $ 1.74 $ 1.38 $1.75 $ 1.73 19 20 X ft CONSOLIDATED STATEMENTS OF OPERATIONS- USD ($) shares in Thousands, Sin Thousands 3 Months Ended Jul. 13, 2019 Dec. 29, 2018 $ 2,332,246 $2,105,072 Oct. 06, 2018 $2,274,982 Jul. 14, 2018 $2,326,652 4 Months Ended Apr. 20, 2019 Apr. 21, 2018 $2,952,036 $2,873,848 12 Months Ended Dec. 28, 2019 Dec. 29, 2018 $ 9,709,003 $9,580,554 5,454,257 5,361,141 4,254,746 4,219,413 3,577,566 3,615,138 677,180 604,275 Dec. 30, 2017 $9,373,784 5.288.735 4,085,049 3,514,837 570,212 1,009,438 928,643 1,006,927 1,011,559 1 ,304,612 1,272,284 (39,898) 464 (39,434) 637,746 150,850 $ 486,896 $6.87 70,869 $6.84 71,165 (56,588) 7,577 (49,011) 555,264 131,417 $ 423,847 $5.75 73,728 $ 5.73 73,991 (58,801) 8,848 (49,953) 520,259 44,754 $ 475,505 $6.44 73,846 $ 6.42 74,110 $ 121,820 $ 1.74 $53,441 $0.74 $ 115,843 $1.57 $ 117,836 $ 1.59 OFFRES $ 142,500 $ 1.99 $ 136,727 $1.85 $1.73 $ 0.74 $1.56 $ 1.59 $ 1.98 $ 1.84