Unit 08 · Case
The Fourth Outlet
Project Valuation · Nigeria · ₦
This is the student brief. The instructor guide is distributed separately.
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A Lagos quick-service restaurant group runs three outlets — Ikeja, Surulere, and Victoria Island. Nigerian food, fast service, mostly office workers at lunch. The business is profitable and has been for nine years.
The family that owns it wants to open a fourth outlet in Lekki. A landlord has offered a five-year lease on a good corner site. The operations director has spent three months on the proposal and is presenting it to the family this week.
Mountain River has been asked for a view.
Exhibit 1 · The commitment and the assumptions
| Item | Amount |
|---|---|
| Fit-out and equipment | 85.0 |
| depreciated straight-line over 5 years, so | 17.0 a year |
| Initial working capital | 5.6 |
| Total Year 0 outlay | 90.6 |
| Item | Value |
|---|---|
| Year 1 revenue | ₦140.0m |
| Revenue growth, Years 2–5 | 10% |
| Food cost | 38% of revenue |
| Year 1 operating expenses | ₦62.0m |
| Operating expense growth | 12% |
| Working capital | 4% of revenue |
| Tax rate | 30% |
| Discount rate | 22% |
| Long-run growth after Year 5 | 8% |
| Terminal return on invested capital | 14% |
The plan assumes NO cannibalisation of the Victoria Island outlet.
Exhibit 2 · Free cash flow — Years 1 to 5 supplied
| Line | Y1 | Y2 | Y3 | Y4 | Y5 |
|---|---|---|---|---|---|
| Revenue | 140.00 | 154.00 | 169.40 | 186.34 | 204.97 |
| Food cost | (53.20) | (58.52) | (64.37) | (70.81) | (77.89) |
| Operating expenses | (62.00) | (69.44) | (77.77) | (87.11) | (97.56) |
| Depreciation | (17.00) | (17.00) | (17.00) | (17.00) | (17.00) |
| EBIT | 7.80 | 9.04 | 10.26 | 11.43 | 12.53 |
| Tax at 30% | (2.34) | (2.71) | (3.08) | (3.43) | (3.76) |
| After-tax EBIT | 5.46 | 6.33 | 7.18 | 8.00 | 8.77 |
| Add depreciation | 17.00 | 17.00 | 17.00 | 17.00 | 17.00 |
| Less increase in working capital | 0.00 | (0.56) | (0.62) | (0.68) | (0.75) |
| FREE CASH FLOW | 22.46 | 22.77 | 23.56 | 24.32 | 25.02 |
Exhibit 3 · Discount factors at 22%
| Year | Factor | Year | Factor |
|---|---|---|---|
| 1 | 0.8197 | 4 | 0.4514 |
| 2 | 0.6719 | 5 | 0.3700 |
| 3 | 0.5507 |
Question 1 · 15 minutes
The present value of Years 1 to 5 is supplied as ₦66.92 million. Compute the terminal value twice:
(a) by growing Year 5 free cash flow at 8 percent and applying the perpetuity formula; (b) by rebuilding Year 6 free cash flow with the supplied terminal reinvestment bridge below, then applying the same formula.
Terminal reinvestment rate = g / ROIC
= 8% / 14%
= 57.1% of NOPAT
Maintenance capex equals depreciation. Total reinvestment
also includes growth net capex and the increase in working capital.
Report the project NPV under each.
Question 2 · 13 minutes
The two answers differ enormously. Explain why, and say which is right.
Your explanation should describe, in plain language, what business the incorrect version is actually describing.
Question 3 · 9 minutes
What do you tell the family?
The plan assumes no cannibalisation of the Victoria Island outlet, fifteen minutes away. Name the evidence you would want on that — and state what else would change your recommendation.